TIDMLGEN
RNS Number : 5862G
Legal & General Group Plc
09 August 2016
Stock Exchange Release
09 August 2016
net cash generation up 16%, RoE(1) of 20%, SII SURPLUS oF
GBP5.3BN
financial highlights(2) :
-- Net cash GENERATION up 16% to GBP727m (h1 2015: GBP629m)
-- adjusted OPERATING PROFIT(3) up 10% to GBP822M (h1 2015: GBP750m)
-- Profit after tax UP 22% to GBP667m (h1 2015: GBP547m)
-- Earnings per share up 24% to 11.27P (h1 2015: 9.11p)
-- adjusted Earnings per share(4) UP 14% to 11.20P (h1 2015: 9.79p)
-- return on equity(1) 20.4% (h1 2015: 19.1%)
-- SOLVENCY II SURPLUS OF GBP5.3BN (FY 2015: GBP5.5BN)
-- SOLVENCY II COVERAGE RATIO OF 158%, (163% oN a SHAREHOLDER BASIS)
-- new formulaic approach to setting the interim dividend: 30%
of 2015 full year dividend at 4.00p per share
business highlights:
-- lgr ANNUITY ASSETS UP 18% AT GBP51.0BN (h1 2015: GBP43.4BN)
-- GROUP-WIDE DIRECT INVESTMENT UP 28% AT GBP8.0BN (h1 2015: GBP6.2bn)
-- LGIM AUM UP 18% AT GBP841.5BN (h1 2015: GBP714.6BN)
Nigel Wilson, Group Chief Executive, said:
"We have continued to execute our strategy well. Shareholders'
profit before tax grew 23% to GBP826m, adjusted EPS grew 14% to
11.2p, net cash generation grew by 16% to GBP727m and the Group
delivered a 20% RoE. We have a strong balance sheet, which gives us
the flexibility and capacity to invest in support of each of our
businesses.
There are many different views of the outlook for economic
growth, the state of financial markets and political uncertainty.
We reflect this in our approach to risk management. While we cannot
be immune to this uncertainty, we remain confident that we will
continue to deliver attractive returns for shareholders, great
value to customers and better outcomes for society. Our five
long-term growth drivers, ageing populations, globalisation of
asset markets, creating real assets, welfare reform and digital
remain unaffected and will continue to provide many growth
opportunities."
1. Return on equity is calculated by taking annualised profit
after tax attributable to equity holders of the Company (twice the
half-year number), as an average of shareholders' equity during the
period, excluding a GBP4m profit in relation to the disposal of
Suffolk Life (H1 2015: GBP40m impairment loss in relation to the
subsequent disposals of Legal & General France and Legal &
General Gulf).
2. The metrics within the Group's financial highlights are defined in the glossary.
3. Adjusted operating profit is calculated as operating profit
of GBP777m (H1 2015: GBP750m) before the cost of the provision in
respect of the closure of our Kingswood office of GBP45m (H1 2015:
GBPnil).
4. Adjusted earnings per share is calculated by dividing profit
after tax, excluding the GBP4m profit (H1 2015: GBP40m loss)
described in note 1, by the weighted average number of ordinary
shares in issue during the period.
FINANCIAL SUMMARY
GBPm H1 2016 H1 2015 Growth
%
================================================= ======= ======= ======
Analysis of operating profit
Legal & General Retirement 406 281 44
Legal & General Investment Management 171 176 (3)
Legal & General Capital 135 115 17
Insurance 138 186 (26)
Savings 49 55 (11)
Legal & General America 43 40 8
Operating profit from divisions 942 853 10
Group debt costs (86) (75) (15)
Group investment projects and expenses (34) (28) (21)
Adjusted operating profit 822 750 10
Kingswood office closure provision (45) - n/a
Operating profit 777 750 4
Investment and other variances (inc. minority
interests) 49 (78) n/a
Profit before tax attributable to equity holders 826 672 23
Operational cash generation 655 624 5
New business surplus 72 5 n/a
Net cash generation 727 629 16
LEGAL & GENERAL RETIREMENT (LGR)
GBPm H1 2016 H1 2015 Growth
%
Annuity assets (GBPbn) 51.0 43.4 18
of which: direct investments (GBPbn) 6.2 4.9 27
Annuity sales 3,788 1,326 186
Lifetime mortgage advances 231 37 524
LEGAL & GENERAL INVESTMENT MANAGEMENT (LGIM)
GBPbn H1 2016 H1 2015 Growth
%
LGIM total AUM(1, 2) 841.5 714.6 18
LGIM total international AUM 151.9 115.8 31
External AUM net flows 9.6 13.8 (30)
Workplace AUA 17.3 13.1 32
LEGAL & GENERAL CAPITAL (LGC)
GBPbn H1 2016 H1 2015 Growth
%
LGC assets 5.9 4.8 23
of which: direct investments 1.1 0.8 37
INSURANCE
GBPm H1 2016 H1 2015 Growth
%
UK Protection gross premiums 815 774 5
General insurance gross premiums 156 164 (5)
UK Protection new business annual premiums 118 119 (1)
SAVINGS
GBPbn H1 2016 H1 2015 Growth
%
Savings AUA(3) 102.0 110.8 (8)
LEGAL & GENERAL AMERICA (LGA)
$m H1 2016 H1 2015 Growth
%
LGA gross premiums(4) 601 588 2
1. LGIM total AUM includes GBP244.0bn (H1 2015: GBP208.1bn) of
derivative overlay assets associated with the Solutions
business.
2. LGIM AUM includes GBP51.0bn (H1 2015: GBP43.4bn) managed on
behalf of LGR and GBP31.5bn (H1 2015: GBP34.0bn) managed on behalf
of Savings.
3. Savings AUA as at 30 June 2015 included GBP8.3bn in respect
of Suffolk Life, a business which was disposed of in H1 2016, and
GBP2.8bn in respect of Legal & General International (Ireland),
a business which was disposed of in H2 2015.
4. LGA gross premiums excludes $65m (H1 2015: $nil) of US
pension risk transfer business which is reported within LGR.
commentary on h1 financial performance
Income statement
Adjusted operating profit increased 10% to GBP822m (H1 2015:
GBP750m).
LGR delivered a 44% growth in operating profit, to GBP406m (H1
2015: GBP281m), driven by strong back book performance feeding
through to operational cash generation of GBP205m (H1 2015:
GBP171m) and strong front book activity generating new business
surplus of GBP79m (H1 2015: GBP22m). Refinements to the valuation
methodology for longevity swaps resulted in a GBP58m one off
benefit to operating profit. Longevity experience in the period was
also positive compared to our best estimate assumption.
LGIM operating profit fell by 3% to GBP171m (H1 2015: GBP176m).
Management fee revenues were up 4% to GBP337m (H1 2015: GBP324m)
but transactional revenues were lower at GBP16m (H1 2015: GBP23m),
driven by fewer property transactions. The average monthly closing
assets under management (AUM) for the six months was GBP784.1bn (H1
2015: GBP715.2bn). There was a significant appreciation in asset
values towards the end of June, which increased the H1 2016 closing
AUM to GBP841.5bn (H1 2015: GBP714.6bn).
Insurance operating profit fell by GBP48m to GBP138m (H1 2015:
GBP186m) primarily as a consequence of a c.GBP40m lower expected
release from the UK Protection back book, adverse mortality
experience of GBP18m (H1 2015: GBP5m positive), mainly in our Group
Protection business, and the introduction of the annual Flood Re
levy for our General Insurance business of GBP9m, the cost of which
was expensed in H1 2016. H1 2015 operating profit also included
GBP7m operating profit from Legal & General France, which was
disposed of on 31(st) December 2015. These impacts were partially
offset by improved new business surplus and a GBP31m positive
assumption change following a review of the prudence held for
renewal expenses.
The LGC operating profit increased by 17% to GBP135m (H1 2015:
GBP115m), driven by the operating businesses within our LGC direct
investments portfolio, which delivered operating profits of GBP36m
(H1 2015: GBP10m).
Operational cash generation increased 5% to GBP655m (H1 2015:
GBP624m)
Operational cash generation has increased broadly in line with
the guidance we previously issued. LGR delivered a GBP34m increase
in operational cash generation to GBP205m (H1 2015: GBP171m)
resulting from a higher expected release following assessment of
the prudence held within our reserves.
Net cash generation increased 16% to GBP727m (H1 2015:
GBP629m)
New business surplus increased to GBP72m (H1 2015: GBP5m). LGR
delivered new business surplus of GBP79m (H1 2015: GBP22m)
resulting from significantly higher annuity sales of GBP3.8bn (H1
2015: GBP1.3bn). Bulk annuity sales were GBP3.6bn including a
GBP2.9bn back book annuity transaction with Aegon, for which we
have retained the longevity risk. In H1 2016 we reinsured GBP444m
of longevity risk in relation to new business.
Insurance delivered new business surplus of GBP7m (H1 2015:
GBPnil) reflecting higher levels of efficiency on an increasing
premium base. Total UK Retail and Group protection premiums
increased 5% to GBP815m (H1 2015: GBP774m).
Shareholders' profit before tax increased 23% to GBP826m (H1
2015: GBP672m), including Group investment variances of GBP58m (H1
2015: GBP(29)m).
We manage our exposure to interest rate and foreign exchange at
a legal entity and Group level. At a divisional level however,
profit before tax has been impacted by reductions in interest rates
and movements in foreign exchange. Specifically:
Insurance profit before tax reduced to GBP46m (H1 2015:
GBP138m), with negative investment variance of GBP(92)m (H1 2015:
GBP(48)m) following a c.1% reduction in UK government bond yields,
impacting the discount rate used to calculate the reserves for our
UK Protection liabilities;
LGR profit before tax benefitted from a GBP63m (H1 2015: GBP11m)
positive investment variance arising from active management of the
assets in the annuity fund; and
LGC profit before tax benefitted from a positive investment
variance of GBP60m (H1 2015: GBP(4)m) primarily driven by foreign
exchange gains, particularly on un-hedged US dollar denominated
investments.
balance sheet
Capital
The Group's Solvency II surplus at the half year was estimated
at GBP5.3bn, representing a coverage ratio of 158% (FY 2015:
surplus of GBP5.5bn, coverage ratio of 169%). This is stated after
recalculation of Transitional Measures for Technical
Provisions.
Eligible own funds were GBP14.3bn (FY 2015: GBP13.5bn), the
solvency capital requirement (SCR) was GBP9.0bn (FY 2015: GBP8.0bn)
resulting in a surplus of GBP5.3bn (FY 2015: GBP5.5bn).
Eligible own funds increased by GBP0.8bn reflecting surplus
generated net of investment movements in H1 2016 and positive
management actions offset by the payment of the 2015 final dividend
of GBP592m. Management actions included removing eligibility
restrictions on assets held in reassurance collateral accounts
where the specific trust structure had made the surplus assets
ineligible under the Solvency II rules, the treatment of which is
awaiting regulatory approval. In addition we have reviewed the
provision for specific items, including bulk purchase annuity data
loading and Solvency II allowing for negative reserves. The SCR
increased by GBP1.0bn from year-end 2015, largely driven by the
fall in risk free rates.
On a shareholder basis, adjusting for the Own Funds and SCR of
the With-profits fund, the Group's Solvency II coverage ratio was
163% with eligible own funds of GBP13.7bn and SCR of GBP8.4bn.
Overall, our Solvency II balance sheet has demonstrated its
resilience to recent market volatility, including that caused by
the market reaction to the EU Referendum outcome, just before
30(th) June 2016.
The Group remains focussed on delivering appropriate returns on
the capital we choose to deploy. We estimate, using a Solvency II
cost of capital, that LGR will deliver a 10.2% new business margin
and our UK insurance business an 11.1% new business margin for the
business we have written in H1 2016.
The Group's economic capital surplus was GBP8.1bn (FY 2015:
GBP7.6bn), representing a coverage ratio of 235% (FY 2015: 230%).
Eligible own funds was GBP14.0bn (FY 2015: GBP13.5bn) and the
economic capital requirement was GBP5.9bn (FY 2015: GBP5.9bn).
Asset portfolio
Shareholder investment exposure arises mainly in the LGR and LGC
investment portfolios. Our largest exposure within the shareholder
investment portfolio is to credit assets.
Our global credit team keeps our portfolios under continuous
review and in recent months has actively de-risked the credit
component of Eligible Own Funds as well as LGR's GBP47.9bn 'A
minus' rated bond portfolio. This has included selling
sub-investment grade credit and reducing our exposure to European
banks' subordinated debt. The portfolio is well diversified by
sector and by geography.
Elsewhere in the shareholder investment portfolio there is
GBP2.5bn of property, of which 94% is fully let and a further 4% is
property under development. The vast majority of the Group's
property assets are held for their income characteristics as
opposed to capital appreciation.
DIVID
The Board adopted a progressive dividend policy in March 2016
reflecting the Group's expected medium term underlying business
growth, including net cash generation and operating earnings. There
is no change to this dividend policy.
For this interim dividend and going forward the Board has
decided to adopt a formulaic approach to setting the interim
dividend, being 30% of the prior year full year dividend. We have
therefore declared an interim dividend of 4.00p per share.
outlook
The Group's strategy is aligned to, what we believe to be, five
established long term growth drivers: ageing populations;
globalisation of asset markets; creating real assets; welfare
reform; and digital. There are a range of different views amongst
market commentators regarding the potential impacts of the recent
EU referendum result on the wider economy, and this in turn has
created greater market volatility which, we expect to continue for
some time. Although no business model can be immunised against
slowing global economic activity, the opportunities available to
the Group should remain largely unchanged and we will strive to
execute our strategy successfully to deliver profitable growth.
International demand for pension risk transfer solutions remains
strong and is expected to continue for many years. In the UK alone,
we are currently quoting on over GBP13bn of buy-in and buy-out
deals and over GBP16bn of longevity deals. We will remain
disciplined in the deployment of our capital, selecting the
opportunities that deliver the best return on capital across
annuity and longevity transactions. Our self-manufacturing and
wider asset management capabilities, together with deep
understanding and management of longevity risk, mean we anticipate
being able to provide effective solutions for our clients.
The lifetime mortgage market grew 24% in H1 2016 to GBP934m and
is on track to exceed GBP2bn for the first time in 2016. We are
targeting to write up to GBP500m of lifetime mortgages new business
in 2016, which would represent approximately 25% of the market.
LGIM had a good first half against the backdrop of challenging
investment markets, with GBP9.6bn of external net inflows. It is
well positioned to handle the uncertain economic and political
environment that lies ahead, and continuing fee pressure in asset
management markets. LGIM is focused on serving its clients and
providing innovative risk management solutions and thereby
delivering growth and diversification in its chosen markets.
LGC will invest further shareholder capital in housing;
infrastructure and SME finance, where we expect there to be
attractive returns. In the wider context, it also provides wider
benefit to the Group with improved access to additional assets and
fee earning opportunities.
We intend to switch a larger proportion of assets within both
LGR and LGC from traded assets to direct investments, with a medium
term target of GBP15bn.
LEGAL & GENERAL RETIREMENT
FINANCIAL HIGHLIGHTS GBPm H1 2016 H1 2015
Operational cash generation 205 171
New business surplus 79 22
Net cash generation 284 193
Experience variances, assumption changes, tax
and non-cash movements 122 88
Operating profit 406 281
Profit Before Tax 469 292
Back book acquisitions 2,944 -
UK bulk annuities 641 1,146
International bulk annuities 45 -
Individual annuity single premiums 158 180
Lifetime mortgage advances 231 37
Total LGR new business 4,019 1,363
Annuity net inflows (GBPbn) 2.6 0.2
Total annuity assets (GBPbn) 51.0 43.4
Longevity insurance gross premiums 161 164
record profits
LGR profitability increased on all measures.
Operational cash generation increased to GBP205m (H1 2015:
GBP171m), benefitting from increased releases of prudential margins
as we continue to refine our assessment of best estimate
reserves.
Net cash generation increased to GBP284m (H1 2015: GBP193m) with
new business surplus of GBP79m (H1 2015: GBP22m) reflecting higher
levels of new business and a 10.2% new business margin on SII
capital. The net cash generation benefited in particular from the
Aegon back book acquisition, for which we have retained the
longevity risk.
Operating profit increased to GBP406m (H1 2015: GBP281m)
including a GBP58m one-off benefit from a change in treatment to
historic longevity insurance deals where future fees in excess of
prudent estimates of longevity and expense experience are now
included as an offset to IFRS reserves. This is now consistent with
the approach used for other product lines across the Group.
ONGOING credit and ASSET management
Credit portfolio management
LGR's GBP51.0bn asset portfolio backing its IFRS liabilities is
well diversified. We hold GBP2.7bn of credit default reserves
(2015: GBP2.2bn) against these assets. Within the GBP47.9bn bond
portfolio, just over 2/3rds of the portfolio is A-rated or better
(67%), 30% BBB-rated and 3% sub-investment grade. The bond
portfolio has 4.7% in Banks, 4.7% in Oil & Gas and 3.9% in
bonds in the property sector, illustrating the high degree of
diversification in the portfolio.
Direct Investment
Our direct investment portfolio is secured through directly
negotiated covenants and security or collateral. This portfolio is
now GBP6.2bn, (H1 2015: GBP4.9bn) with a further GBP440m in
lifetime mortgages. The ability to self-manufacture attractive
assets to back annuities, working with LGIM, LGC or through
lifetime mortgages, is an important feature of LGR's business as
the hunt for yield continues with lower for longer interest
rates.
diverse new business OPPORTUNITIES
The global demographic trend of ageing populations is here to
stay. The need for products and services to manage the consequences
of ageing populations is increasing, and our strategy is to be at
the forefront of providing those products and services. One such
consequence is the demise of private sector defined benefit
pensions globally and its associated need for a managed run-off.
Another consequence is more individuals aiming for financial
security in retirement and a need to accumulate wealth, and then
access this wealth flexibly in retirement. Our new business themes
of Global Pension Risk Transfer and Individual Retirement Choices
are there to meet these two substantial and growing needs.
Global Pension Risk Transfer
We completed GBP686m of buy-ins and buy-outs in the first half
of 2016, and a further GBP750m buy-in with the ICI Pension Fund on
5th July. The GBP686m included GBP250m in June alone and a $65m US
bulk annuity deal in February.
The UK private sector defined benefit market is estimated at
GBP2 trillion and the UK market pipeline for pension risk transfer
remains strong. We are currently quoting on over GBP13bn of buy-in
and buy-out deals and over GBP16bn of longevity deals. Whilst lower
real yields increase the average pension fund deficit, the post
referendum outcome for pension funds has varied meaningfully
depending on the amount of LDI hedging they have done, the extent
to which equities have been switched to bonds, and the extent to
which equities have been diversified globally with or without
currency hedging. We estimate that at least 50% of the interest
rate and inflation risk has been removed from the UK private sector
defined benefit system.
Furthermore, pension funds are looking to de-risk in steps that
can include tranches of pensioner buy-ins, top-slicing, medically
underwritten bulk annuities or longevity insurance as a first step.
Pension funds do not need to be fully funded or fully hedged to
make progress. Legal & General is well placed for this
incremental approach as a financially sound partner, committed to
the pension risk transfer market. We are unique in being able to
offer all possible pension risk transfer and DB pension de-risking
steps.
Our aim is to recreate this strategy in the US. The market
pipeline of deals is substantial, we continue to quote diligently
and build our experience in this market. Our reinsurance hub,
L&G Re, A+-rated, in a Solvency II equivalent regime, and with
registered reinsurer status in the Netherlands, allows us to
participate as a reinsurer in European pension risk transfer
market. We are quoting on several deals and are looking to build on
last year's new business.
Individual Retirement Choices
We remain committed to the individual annuity market and wrote
GBP158m in H1 2016, down 12% from the GBP180m written in H1 2015.
In July, we agreed an arrangement with Aegon where Legal &
General would be Aegon's preferred supplier of annuity business
from October 2016. We expect this arrangement to increase Legal
& General's individual annuity volumes by approximately
50%.
Lifetime mortgage lending was GBP231m in H1 2016 (H1 2015:
GBP37m). The lifetime mortgage market grew 24% in H1 2016 to over
GBP900m and is on track to exceed GBP2bn for the first time in
2016. The number of people over 60 years old is expected to grow by
6.3 million in the next 20 years. This fact coupled with an
estimated GBP1.4 trillion of housing equity currently owned by the
over 65s in the UK, makes the long-term growth characteristics of
this market strong.
In July 2016 we signed a 5 year agreement with Santander to
offer Lifetime Mortgages to their customers. We anticipate that
this will result in an additional GBP100m of lifetime mortgages per
annum.
Industry consolidation
The combination of Freedom & Choice in Pensions and the
introduction of the EU's Solvency II regime has already led to
consolidation among individual and bulk annuity providers. We
participated in this consolidation in May with the acquisition of a
GBP2.9bn back book of individual annuities from Aegon. In July we
agreed a five year distribution agreement with Aegon to offer Legal
& General annuities to Aegon customers from October 2016. The
partnership is expected to generate around GBP200m of individual
annuity sales in the first 12 months. We remain interested in
further consolidation opportunities.
LEGAL & GENERAL investment management
FINANCIAL HIGHLIGHTS GBPm H1 2016 H1 2015
Management fee revenue 337 324
Transactional revenue 16 23
============================================= ======= ========
Total revenue 353 347
Total costs (179) (168)
Asset management operating profit 174 179
Workplace operating profit (3) (3)
============================================= ======= ========
Total operating profit 171 176
Net cash generation 134 138
Cost:income ratio(1) (%) 50 48
External net flows (GBPbn) 9.6 13.8
Internal net flows (GBPbn) 0.3 (1.0)
Total net flows (GBPbn) 9.9 12.8
Of which international (GBPbn) 6.7 5.4
GBPbn H1 2016 H1 2015
Assets under management, including overlay
assets(2) 841.5 714.6
Advisory assets 11.6 11.3
Total assets 853.1 725.9
Of which:
- International assets under management, including
overlay assets(2) 151.9 115.8
- International advisory assets 11.6 11.3
========================================================= ======= ========
- Total international assets 163.5 127.1
Assets under administration - Workplace Savings 17.3 13.1
1. Excluding Workplace Savings and recoverable market data costs
which are treated as a cost of sale.
2. Assets under management include overlay assets, which
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.
resiliencE in challenging markets
The business environment in the first half of 2016 has been
challenging, given political and economic uncertainty and volatile
market conditions. Against this backdrop, LGIM performed robustly
in the first half of 2016, with operating profit down 3% to GBP171m
(H1 2015: GBP176m). External net flows remained positive at
GBP9.6bn (H1 2015: GBP13.8bn), contributing to 18% growth in AUM to
GBP841.5bn (H1 2015: GBP714.6bn). Management fee revenues were up
4% to GBP337m, although transactional revenues were lower at
GBP16m, driven by fewer property transactions.
LGIM continued its prudent investment across the business, with
a focus on the areas that will provide growth and diversification
in the future, resulting in a cost income ratio of 50%. The
International business had strong net inflows of GBP6.7bn (H1 2015:
GBP5.4bn), with positive flows in the US, Europe, the Gulf and
Asia. The retail business performed strongly in a difficult market
for investors, with external net inflows of GBP0.7bn (H1 2015:
GBP0.3bn) and increased market share. In Workplace Savings, the
operating loss was GBP3m (H1 2015: loss of GBP3m), as LGIM incurred
acquisition costs to take on large pension schemes.
breadth of investment management solutions
Active
Asset movements Index fixed Solu- Real Active Total Advisory Total
GBPbn funds income tions assets equities AUM assets assets
At 1 January 2016 274.3 106.8 338.2 18.3 8.5 746.1 10.5 756.6
External inflows 17.6 3.5 6.6 0.8 - 28.5 28.5
-------- --------
External outflows (16.0) (2.2) (6.6) (0.7) (0.1) (25.6) (25.6)
--------
Overlay / advisory
net flows - - 6.7 - - 6.7 (0.3) 6.4
--------
External net flows 1.6 1.3 6.7 0.1 (0.1) 9.6 (0.3) 9.3
Internal net flows (0.4) 0.7 (0.1) 0.1 - 0.3 - 0.3
Total net flows 1.2 2.0 6.6 0.2 (0.1) 9.9 (0.3) 9.6
Cash management movements - (0.6) - - - (0.6) - (0.6)
Market and other movements 24.9 17.6 44.3 (0.1) (0.6) 86.1 1.4 87.5
At 30 June 2016 300.4 125.8 389.1 18.4 7.8 841.5 11.6 853.1
Total AUM increased 18% to GBP841.5bn (H1 2015: GBP714.6bn).
Total external net inflows of GBP9.6bn (H1 2015: GBP13.8bn) were
good in the context of political and economic uncertainty, and a
difficult market. The strength of flows across our main product
lines and channels reinforces the importance of diversifying our
business, and illustrates the breadth of LGIM's investment
capabilities.
LGIM's liability-driven investment (LDI) and Multi-asset
businesses have continued to grow over H1 2016. LGIM was the
largest single beneficiary of a 25% increase in LDI mandates in
2015 and remains the UK market leader with a 44% share, according
to the 2016 KPMG LDI survey. LGIM continues to gain market share in
pooled LDI, which is the fastest-growing segment of the market.
Solutions net inflows, including LDI and multi-asset products, were
GBP6.7bn (H1 2015: GBP12.3bn).
Index external net inflows of GBP1.6bn (H1 2015: GBP1.2bn
outflow) were driven by the continued international diversification
of this business, with net inflows of GBP5.7bn (H1 2015: GBP2.9bn)
from the US, Europe, the Gulf and Asia.
Net external inflows into Active Fixed Income of GBP1.3bn (H1
2015: GBP2.3bn) were driven primarily by institutional clients in
all our main regions.
The Retail business has performed strongly in an extremely
difficult period with external net inflows of GBP0.7bn (H1 2015:
GBP0.3bn), and it continues to gain market share. LGIM was second
in net retail sales in Q2 2016, in what was a difficult quarter for
the fund management industry (Pridham report). AUM increased to
GBP21.4bn (H1 2015: GBP18.9bn).
The Real Assets business has been impacted by the uncertainty
caused by the referendum, leading to fewer transactions in the
property market. LGIM has been able to keep its funds open during
this period of significant volatility. External net inflows were
GBP0.1bn (H1 2015: GBP0.4bn), with AUM of GBP18.4bn (H1 2015:
GBP16.7bn).
OVER Two Million CUSTOMERs IN WORKPLACE PENSIONS
LGIM has continued to build its defined contribution (DC) client
base, winning schemes from across the market on both its investment
only and workplace platforms. The total number of clients on its
workplace platform now exceeds two million, in nearly 7,000
schemes. Net inflows were GBP0.8bn (H1 2015: GBP1.0bn) and total
assets increased by 16% to GBP49.8bn (H1 2015: GBP42.8bn). LGIM has
acquired a minority stake in Smart Pension, a fintech business,
which will expand our presence in the SME market.
INTERNATIONAL expansion continues
LGIM experienced strong net inflows of GBP6.7bn (H1 2015:
GBP5.4bn) in its international businesses. Total International AUM
was GBP151.9bn, a 31% increase on H1 2015: GBP115.8bn. Net inflows
in the US business were GBP3.1bn (H1 2015: GBP4.8bn), with new
defined benefit (DB) and DC mandates. The business continues to
build its LDI and fixed-income capabilities, and growth in Index is
accelerating. In the Gulf, inflows were GBP1.6bn (H1 2015:
GBP0.9bn) as we deepened our existing client relationships. In
Europe, net inflows were GBP1.5bn, driven by strong interest in our
fixed income and multi-asset products. In Asia, LGIM strengthened
its presence in the Japanese market, with inflows from our
partnership with Meiji Yasuda and the signing of a second
co-operation agreement with Nikko Asset Management. Asian net
inflows for the period were GBP0.5bn (H1 2015: GBP0.1bn
outflow).
LEGAL & GENERAL CAPITAL
FINANCIAL HIGHLIGHTS GBPm H1 2016 H1 2015
Operational cash generation 113 92
Operating profit from:
UK Housing 39 15
Infrastructure 24 15
SME finance 5 2
Direct investment operating profit 68 32
Traded investment portfolio 59 79
Treasury assets 8 4
Total operating profit 135 115
Profit before tax 195 111
DIRECT INVESTMENT PORTFOLIO GBPm H1 2016 H1 2015
UK Housing 377 322
Infrastructure 506 379
SME Finance 181 77
1,064 778
TRADED PORTFOLIO(1) GBPm
Equities 1,630 1,598
Fixed income 499 808
Multi-asset 472 221
Cash 1,232 755
3,833 3,382
LGC investment portfolio 4,897 4,160
Treasury assets at holding company GBPm 1,021 621
========================================== ======= ========
TOTAL 5,918 4,781
1. LGC traded portfolio includes holdings in consolidated funds,
which include net non-financial receivables and payables of GBP15m
(H1 2015: GBPnil), which are reported separately in the Group's
consolidated financial statements.
CORE UK TRS DRIVING DIRECT INVESTMENT STRATEGY
The direct investment portfolio delivered operating profit of
GBP68m (H1 2015: GBP32m).
Operating profit is calculated on an actual profit before tax
basis or a smoothed IRR basis dependent on the category and stage
of maturity of the investment. Direct investments from our
operating business, such as CALA Homes, are recognised as our share
of PBT, delivered GBP36m, representing 53% of direct investment
operating profit (H1 2015: GBP10m, 31%).
The past six months has seen LGC continue to perform strongly,
with considerable further investment in core sectors. Driven by
long term social and economic trends, LGC invests in enterprises
which contribute to UK growth with a focus on Housing,
Infrastructure and SME finance. LGC targets attractive
risk-adjusted returns for the Group whilst creating longer-term
investment opportunities for other parts of Legal & General and
institutional investors.
Housing operating profit increase to GBP39m in H1 2016 (H1 2015:
GBP15m)
CALA Homes delivered another year of strong performance,
recording record revenues and profits. Private completions were up
c.8% with private average selling price up c.6%. Strong levels of
forward private reservations provide Cala with good visibility as
the Group heads into the new financial year.
LGC launched a GBP600m build-to-rent JV with PGGM in early 2016
which now has three seed assets in Walthamstow, Bristol and Salford
to build a total of 830 homes. Further sites are currently being
targeted to support the growth of this platform. LGC continued to
focus on realising the potential of its bank of strategic land,
including a 250-acre site at Crowthorne with a GDV of approximately
GBP450m where work has started to build c.1,000 new homes. LGC also
launched its modular homes business which seeks to modernise home
building, and opened a new facility outside Leeds. Fit-out of the
factory continues and interest in the product is strong.
Infrastructure, operating profit increase to GBP24m in H1 2016
(H1 2015: GBP15m)
Infrastructure includes urban regeneration and clean energy
asset classes. During the period, plans were submitted to double
the size of MediaCityUK (Salford) over the next decade, including
up to ten new buildings with a GDV of more than GBP1bn. To date,
the Lexicon (Bracknell) has signed several retail leases in a
GBP200m scheme, bringing space let by floor area to 64% ahead of a
2017 opening. New tenancies have been completed at Thorpe Park
(Leeds), including an agreement with Next during the period and
further signings with M&S Simply Food and Arcadia post Brexit.
In Cardiff, 97% of One Central Square has been let at the site
adjacent to BBC Wales' new building which was acquired by LGR in
2015. Overall, property valuations held up in the period.
LGC also agreed to partner with Newcastle City Council and
University to develop the GBP350m Science Central 24-acre science
and technology hub, and is set to create over 4,000 jobs, 500,000
sq ft of office space and 450 new homes.
In clean energy, LGC's investment in NTR onshore wind fund
reached final close in February at EUR246m, with new commitments
made by the Ireland Strategic Investment Fund and Strathclyde
Pension Fund. During the period, NTR managed the successful project
financing of two of the Fund's wind farm projects, and acquired new
sites to construct a further 27 MW capacity, bringing the total
generating capacity for the fund to 82.5 MW.
Going forward, LGC continues to seek partnerships with local
developers and stakeholders across the UK's towns and cities, and
maximise its partnership with the Regeneration Investment
Organisation (RIO), whilst maintaining discipline over return on
investment requirements.
SME Finance operating profit increase to GBP5m in H1 2016 (H1
2015: GBP2m)
Since the period ended, Pemberton has invested 78% of the
committed capital from its inaugural European Mid-Market Debt Fund,
a fund which is targeting EUR1-1.5bn and will hold the final close
in the next three months. The business continues to perform
strongly.
TRADED PORTFOLIO
LGC's traded investment portfolio delivered operating profit of
GBP59m (H1 2015: GBP79m). Treasury assets contributed a further
GBP8m (H1 2015: GBP4m) to operating profit.
Investment variance on the traded investment portfolio and
treasury assets was GBP77m (H1 2015: GBP(7)m), resulting in a
combined profit before tax from traded assets of GBP144m (H1 2015:
GBP76m).
The traded book holds a diversified set of exposures across
equities, fixed income, multi-asset funds and cash. Overall the
book performed above assumed returns over the half year period,
benefiting from further global yield compression in the fixed
income book. The portfolio also benefited from a currency
translation effect on foreign holdings from the devaluation of GBP
following the market reaction to the outcome of the EU
Referendum.
LGC holds cash for a variety of reasons including working
capital, collateral to cover derivatives trades and cash awaiting
longer term investment. In addition, Group Treasury holds cash and
near cash investments to cover a range of uses including working
capital, imminent known cash flows and collateral to cover
derivatives.
INSURANCE
FINANCIAL HIGHLIGHTS GBPm H1 2016 H1 2015
Operational cash generation 159 161
New business surplus 7 -
Net cash generation 166 161
Experience variances, assumption changes, tax
and non-cash movements (28) 25
Operating profit 138 186
Profit before tax 46 138
================================================ ======= ========
UK Protection new business annual premiums 118 119
Retail Protection gross premiums 582 545
Group Protection gross premiums 233 229
General Insurance gross premiums 156 164
Total UK gross premiums 971 938
sustained net cash generation
Operational cash generation reduced by 2% to GBP159m (H1 2015:
GBP161m). This included GBP48m (H1 2015: GBP18m) of dividends
received from Legal & General Netherlands as we continue to
optimise the efficiency of our balance sheet. This additional
GBP30m is not expected to repeat in H2 2016. UK Protection
operational cash generation was lower at GBP80m (H1 2015: GBP112m)
following changes to the modelling for reinsurance contracts in
2015, to ensure sufficient prudence is being held in later
years.
New business surplus was GBP7m (H1 2015: GBPnil) as we maintain
a disciplined focus on cost management and benefitted from further
scale efficiencies.
continued growth in premium income
Retail Protection gross premium income increased 7% to GBP582m
(H1 2015: GBP545m) with new business annual premium of GBP82m (H1
2015: GBP79m). We remain a leading provider of Retail Protection in
the UK and benefit from a highly efficient automated underwriting
model and broad distribution reach. Our direct distribution channel
delivered Retail Protection new business APE of GBP16m,
representing 14% growth on H1 2015 and now accounts for 20% of new
business APE (H1 2015: GBP14m, 18% of new business APE). Group
Protection gross premium was GBP233m (H1 2015: GBP229m) with new
business of GBP36m (H1 2015: GBP40m).
General Insurance gross premiums reduced to GBP156m (H1 2014:
GBP164m) as we maintained pricing discipline in a competitive
market. Our direct business delivered GWP of GBP54m in H1 2016,
representing 15% growth on H1 2015 and now accounts for 35% of
gross premiums (H1 2015: GBP47m, 29% of gross premiums).
Legal & General Mortgage Club facilitated GBP26bn of
mortgages in H1 2016 (H1 2015: GBP20bn) through strong partnerships
with top lenders and over 9,000 mortgage brokers. As the largest
participant in the intermediated mortgage market in the UK, we are
now involved in one in five of all UK mortgage transactions. Legal
& General Surveying Services continues to deliver a strong
performance, completing over 250k surveys (H1 2015: c.240k).
operating profit impacted by ADVERSE GROUP LIFE MORTALITY
Insurance operating profit fell by GBP48m to GBP138m (H1 2015:
GBP186m) as a consequence of a GBP40m lower expected release from
the UK Protection back book and adverse mortality experience of
GBP18m (H1 2015: GBP5m positive), mainly arising in our Group
Protection business. Our General Insurance operating profit was
GBP31m (H1 2015: GBP38m), despite the impact of the flash floods in
June, which cost c.GBP5m and the introduction of the annual Flood
Re levy of GBP9m, which added 6% to the H1 combined operating
ratio.
These impacts were partially offset by a GBP31m positive
assumption change following a review of the prudence held for UK
protection renewal expenses. H1 2015 operating profit also included
GBP7m operating profit from Legal & General France, which was
disposed of on 31(st) December 2015.
Profit before tax impacted by interest rates
Insurance profit before tax reduced to GBP46m (H1 2015:
GBP138m), as a result of negative investment variance of GBP(92)m
(H1 2015: GBP(48)m) following a c.1% reduction in UK government
bond yields, which impacted the discount rate used to calculate the
reserves for our UK Protection liabilities.
savings
FINANCIAL HIGHLIGHTS GBPm H1 2016 H1 2015
Operational cash generation 51 67
New business strain (3) (5)
Net cash generation 48 62
Experience variances, assumption changes, tax
and non-cash movements 1 (7)
Operating profit 49 55
Profit before tax 53 35
Operational cash generation reduced to GBP51m (H1 2015: GBP67m)
as we continue to manage the reducing contribution from our
declining mature savings business. Net cash generation was GBP14m
lower at GBP48m (H1 2015: GBP62m), with new business strain of
GBP3m (H1 2015: GBP5m) as we reduce the cost base associated with
this business.
Operating profit remains strong at GBP49m (H1 2015 : GBP55m).
The introduction of robotics has increased automation and we
continue to enhance our digital offering to provide more
flexibility for our customers.
On the 15 January 2016 the Group announced the sale of Suffolk
Life to Curtis Banks Group for GBP45m, which completed on 25(th)
May 2016. In H1 2016 and 2015 Suffolk Life contributed GBPnil to
operational cash, net cash generation and operating profit.
Platform assets grow
Total
Mature Retail Consol Savings excluding Suffolk
Platforms Savings Adj Suffolk Life Life
Assets under administration GBPbn GBPbn GBPbn GBPbn GBPbn
At 1 January 2016 76.9 29.6 (6.8) 99.7 8.6
Gross inflows 2.2 0.5 (0.2) 2.5 0.5
Gross outflows (2.9) (1.8) 0.3 (4.4) (0.3)
Net flows (0.7) (1.3) 0.1 (1.9) 0.2
Market and other movements 1.3 1.1 - 2.4 -
Disposal of Suffolk Life - - 1.8 1.8 (8.8)
At 30 June 2016 77.5 29.4 (4.9) 102.0 -
Our Platforms business net flows of GBP(0.7)bn (H1 2015:
GBP1.1bn). Assets under administration (AUA) increased to GBP77.5bn
(H1 2015: GBP74.6bn).
Whilst our platform pension AUA has grown in H1 2016, we have
seen outflows increase mainly through partial encashment as
customers withdraw money for income and other purposes. In Mature
Savings, assets were GBP29.4bn (H1 2015: GBP34.8bn). Mature Savings
net outflows have improved year on year due to improved retention
of our books and in our With-Profits business due to the reducing
maturity profile of some products, particularly Endowments.
FREEDOM AND CHOICE
Since the introduction of the Pensions Reform legislation we
have seen an increase in the proportion of customers wishing to
take their pension pots as cash withdrawals, with approximately
90%, or 27,000 customers, electing to take cash payments. Our
average payment size is GBP11k. This compares to approximately 60%
of customers taking cash before the reform legislation was
announced.
LEGAL & GENERAL AMERICA
FINANCIAL HIGHLIGHTS $m H1 2016 H1 2015
Operational cash generation 88 80
Operating profit 62 61
Gross premium income 601 588
New business sales (APE) 41 62
improved cash generation
Operational cash generation increased by 10% to $88m (H1 2015:
$80m). This represents the dividends paid by Legal & General
America (LGA) to the Group and reflects the focus of LGA to deliver
operational cash generation.
Operating profit was $62m (H1 2015: $61m) in spite of the
ongoing low interest rate environment reflecting continued growth
in premium revenue.
Gross premium revenue increased 2% to $601m (H1 2015: $588m) and
continues to benefit from strong relationships with the brokerage
general agents, (BGAs), who distribute term assurance in the US
market. LGA is the 10th largest provider of term life assurance, by
annual premium equivalent, in the US and remains the 3rd largest
provider through the key distribution channel of BGAs. LGA now has
1.22m policies (H1 2015: 1.18m).
new business focus on margin improvement
New business volumes were $41m (H1 2015: $62m). LGA continues to
focus on increasing margins and sustaining strong cash generation
to the Group. New business volumes for H2 2016 are expected to be
broadly consistent with H2 2015 of $44m.
Facilitating US Pension risk transfer (PRT) Business
LGA is important to the expansion of the Group in the US and
will continue to provide the regulatory balance sheet,
administrative services and payments to annuitants for LGR America
and back office support for LGIM America.
borrowings
Legal & General continues to have a strong liquidity
position reflecting its requirements for working capital and
derivative collateral. The Group's outstanding core borrowings
total GBP3.1bn (FY 2015: GBP3.1bn). There is also a further
GBP0.4bn (FY 2015: GBP0.5bn) of operational borrowings including
GBP0.2bn (FY 2015: GBP0.6bn) of non-recourse borrowings.
Group debt costs of GBP86m (H1 2015: GBP75m) reflect an average
cost of debt of 5.4% per annum (H1 2015: 5.1% per annum) on average
nominal value of debt balances of GBP3.2bn (H1 2015: GBP3.0bn).
taxation - effective tax rate of 19.2%
Equity holders' Effective Tax Rate (%) H1 2016 H1 2015
Equity holders' total Effective Tax Rate 19.2 18.6
Annualised rate of UK corporation tax 20.00 20.25
In H1 2016, 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.
Trading losses within Legal & General Pensions Limited,
which previously benefitted both LGR and Insurance, were fully
utilised in 2015.
operational and net CASH GENERATION
The table below is set out in the format of the operational cash
generation guidance for 2016 given at the time of the 2015 results
announcement. Net cash generation increased by 16%. This includes
the full year ordinary dividend of $88m from LGA which was received
in Q1 2016.
Updated
2016 FY
GBPm H1 2016 H1 2015 guidance
LGR 205 171
Insurance excluding General Insurance 134 131
Savings 51 67
LGA 61 52
LGC 113 92
Sub-total (on which we provide guidance) 564 513 + c.5%
LGIM 145 150
General Insurance 25 30
Operational cash generation from divisions 734 693
Group debt costs (69) (60)
Other costs (10) (9)
Total operational cash generation 655 624
New business surplus 72 5
Net cash generation 727 629
The revised operational cash generation guidance above, for FY
2016, reflects a higher proportion of cash and cash equivalents
assets in the LGC portfolio than anticipated at the time of our FY
2015 results.
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 Strain Net Variances Profit Tax Profit
Cash Cash and after before
GBPm Gen Gen other tax tax
LGR 205 79 284 50 334 72 406
--------- ----
LGIM 145 (11) 134 - 134 37 171
----
- LGIM (excluding Workplace) 136 - 136 - 136 38 174
----
- Workplace Savings 9 (11) (2) - (2) (1) (3)
----
LGC 113 - 113 - 113 22 135
----
Insurance 159 7 166 (56) 110 28 138
----
Savings 51 (3) 48 (9) 39 10 49
LGA 61 - 61 (43) 18 25 43
Operating profit from
divisions 734 72 806 (58) 748 194 942
Group debt and other
costs (79) - (79) (17) (96) (24) (120)
Adjusted operating profit 655 72 727 (75) 652 170 822
Kingswood closure costs - - - (36) (36) (9) (45)
Operating profit 655 72 727 (111) 616 161 777
Investment and other
variances - - - 51 51 (2) 49
Total 655 72 727 (60) 667 159 826
Per share 10.95 12.21 11.21
Dividend per share 4.00 4.00
SOLVENCY II
As at 30 June 2016 the Group had an estimated Solvency II
surplus of GBP5.3bn over its Solvency capital requirement,
corresponding to a Solvency II coverage ratio of 158%.
Capital (GBPbn) (1) H1 2016 FY 2015
Group capital resources 14.3 13.5
Group capital resources requirements (9.0) (8.0)
Surplus 5.3 5.5
SCR Coverage ratio (%) 158% 169%
1. Solvency II position on a proforma basis as at 30 June 2016
and before the accrual of the interim dividend.
Solvency
II surplus
Analysis of movement from 1 January to 30 June
2016 (GBPbn)
Solvency II surplus as at 1 January 2016 5.5
Operating experience expected release 0.5
Operating experience new business -
Market movements (0.6)
Other capital movements 0.5
Dividends declared in the period (0.6)
Solvency II surplus as at 30 June 2016 5.3
When stated on a shareholder basis, excluding the SCR
attributable to our With-Profits fund of GBP651m from both the
Group's eligible own funds and the SCR, the Group's coverage ratio
increases to 163%.
estimated solvency II new business contribution
Following our decision to discontinue European Embedded Value
reporting, we committed to provide the market with a replacement
measure of new business profitability under the new Solvency II
regime.
The "Solvency II Value Metric" provides a measure of the value
created in the business allowing for the run-off of Solvency II
capital. The Value Metric essentially follows the principles of the
EEV, but assumes profit emergence based on a Solvency II basis
instead of the previous Solvency I Pillar 1 regime. Other
methodologies are unchanged.
Management estimates of the value of new business and the margin
as at H1 2016 are shown below:
Contribution
from
PVNBP new business Margin %
LGR(1) (GBPm) 3,743 382 10.2
UK Insurance Total (GBPm) 727 81 11.1
- Individual protection 565 69 12.2
- Workplace health and protection 162 12 7.4
LGA ($m) 435 54 12.4
1. UK annuity business.
Key assumptions in calculating the Solvency II new business
contribution are shown below:
Risk margin 3.5%
Risk free rate
- UK 1.1%
- US 1.3%
Risk discount rate (net of tax)
- UK 4.6%
- US 4.8%
Long term rate of return on non-profit annuities
in LGR 3.2%
All other assumptions and methodologies that would have a
material impact on the margin for these contracts are unchanged
from end 2015 other than the cost of currency hedging which has
been updated to reflect current market conditions and hedging
activity in light of Solvency II.
economic capital
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. Our Economic
Capital model is not subject to review or approval by the
Prudential Regulatory Authority (PRA).
As at 30 June 2016 Legal & General Group had an economic
capital surplus of GBP8.1bn (FY 2015: GBP7.6bn), corresponding to
an economic capital coverage ratio of 235% (FY 2015: 230%).
Eligible own funds increased by GBP0.5bn to GBP14.0bn (FY 2015:
GBP13.5bn). The economic capital requirement was GBP5.9bn (FY 2015:
GBP5.9bn).
Capital (GBPbn) H1 2016 2015
Eligible own funds 14.0 13.5
Economic capital requirement (5.9) (5.9)
Economic capital surplus 8.1 7.6
Coverage ratio (%) 235 230
Economic
Analysis of movement from 1 January to 30 June Capital
2016 (GBPbn) surplus
Economic solvency position as at 1 January
2016 7.6
Operating experience expected release 0.5
Operating experience new business 0.2
Market movements 0.1
Other capital movements 0.3
Dividends declared in the period (0.6)
Economic solvency position as at 30 June 2016 8.1
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 TR, OUTLOOK AND MITIGATION
Reserves and our assessment of We undertake significant analysis of
capital requirements may require the variables associated with writing
revision as a result of changes long-term insurance business to ensure
in experience, regulation or legislation. that a suitable premium is charged
The writing of long-term insurance for the risks we take on, and that
business requires the setting of reserves continue to remain appropriate.
assumptions for long-term trends Certain extreme events, however, could
in factors such as mortality, lapse require us to adjust our reserves.
rates, valuation interest rates, For example in our annuities business,
expenses and credit defaults. Actual while recent trend data suggests the
experience may result in the need rate of longevity improvement may be
to recalibrate these assumptions slowing, we are inherently exposed
reducing profitability. Management to the risk that a dramatic advance
estimates are also required in in medical science beyond that anticipated
the derivation of Solvency II capital leads to an unexpected change in life
metrics. These include modelling expectancy. This could require adjustment
simplifications to reflect that to reserves as improvements in mortality
it is not possible to perfectly emerged. In our protection businesses,
model the external environment, the emergence of new factors with potential
with adjustment necessitated where to cause widespread mortality / morbidity
new data emerges. Forced changes or significant policy lapse rates may
in reserves can also arise from similarly require us to re-evaluate
regulatory or legislative intervention reserves. To mitigate these risks we
in the way that products are priced, remain focused on developing a comprehensive
reducing profitability and future understanding of longevity science
earnings. and continue to evolve and develop
our underwriting capabilities for protection
business. Our selective use of reinsurance
also acts to reduce the impacts of
these risk factors.
Investment market performance and During the first half of 2016, we have
conditions in the broader economy seen volatility in financial markets
may adversely impact earnings, as they have responded to uncertainties
profitability or surplus capital. in the global economy and more recently
The performance and liquidity of to the outcome of the UK referendum
investment markets, interest rate on membership of the EU. For Legal
movements and inflation impact & General the vote to leave has little
the value of investments we hold direct impact on trading, as our customer
in shareholders' funds and those base is located very largely in the
to meet the obligations from insurance UK, the US and Asia. It is, however,
business, with the movement in probable that a potentially lengthy
certain investments directly impacting period of negotiation and an uncertain
profitability. Interest rate movements outcome will create on-going uncertainty
and inflation can also change the for financial markets and the broader
value of our obligations. We use UK economy in which we operate; with
a range of techniques to manage potential for asset price shifts should
mismatches between assets and liabilities. markets reappraise their value in the
However, loss can still arise from light of uncertainties. Whilst the
adverse markets. Interest rate monetary policies of leading economies
expectations leading to falls in now look set to remain loose, with
the risk free yield curve can also a further sustained period of low interest
create a greater degree of inherent rates, potential exists for renewed
volatility to be managed in the financial stress in Europe driven by
Solvency II balance sheet, than political uncertainty and residual
the underlying economic position weaknesses in the Euro currency banking
would dictate, potentially impacting systems. Broader geo-political events
capital requirements and surplus also have potential to cause shocks
capital. In addition, significant to financial markets, with on-going
falls in investment values can illiquidity in bond markets having
reduce fee income to our investment potential to exaggerate the impacts
management business, while broader of any significant market corrections.
economic conditions can impact Overall, we seek as part of our business
the purchase and the retention planning activity to model a broad
of retail financial services products, range of economic and financial market
impacting profitability. scenarios so as to ensure our strategies
remain resilient; however, it is not
possible to completely remove risk
from external market and economic factors.
In dealing with issuers of debt Any deterioration in economic conditions
and other types of counterparty inherently increases default risks,
the group is exposed to the risk which in turn may impact our Solvency
of financial loss. II balance sheet surplus. Current risk
A systemic default event within factors include the changing global
the corporate sector, or a major economic outlook with uncertainties
sovereign debt event, could result following the UK referendum on EU membership
in dislocation of bond markets, potentially exacerbating down side
significantly widening credit spreads risks, a renewed banking crisis within
with consequential impacts on the the Euro zone area and default on debt
value of our bond portfolios, and linked to commodity markets. We continue
may result in default of even strongly to actively manage our exposure to
rated issuers of debt, exposing default risks within our bond portfolios,
us to financial loss. We are also setting selection criteria and exposure
exposed to banking, money market limits, and using the capabilities
and reinsurance counterparties, of LGIM's global credit team to ensure
and settlement, custody and other the risks are effectively controlled,
bespoke business services, a failure and if appropriate traded out to improve
of which could expose us to both credit quality. We also seek to closely
financial loss and operational manage risks to our Solvency II balance
disruption of our business processes. sheet through monitoring factors that
Under Solvency II, a widespread could give rise to a heightened level
widening of credit spreads and of default risk. We continue to diversify
downgrades can also result in a the asset classes backing our annuities
reduction in our Solvency II balance business, investing in real assets
sheet surplus, despite already and property lending investments, continuing
setting aside significant capital to be highly selective in the counterparties
for credit risk. with which we will deal. However, we
can never completely eliminate default
risks or their impacts to our Solvency
II balance sheet, although we seek
to hold a strong balance sheet that
we believe to be prudent for a range
of adverse scenarios.
Changes in regulation or legislation There remains a significant regulatory
may have a detrimental effect on change agenda, both from the EU and
our strategy. from within the UK. Current changes
Legislation and government fiscal in EU driven regulation include UCITS
policy influence our product design, V, MIFID II and PRIIPS. While over
the period of retention of products the longer term, "Brexit" will potentially
and our required reserves for future lead to a re-writing of some elements
liabilities. Regulation defines of the financial services legislation
the overall framework for the design, applicable to UK businesses, until
marketing, taxation and distribution the UK formally exits the EU and the
of our products; and the prudential UK Government legislates otherwise,
capital that we hold. Significant EU derived legislation will remain
changes in legislation or regulation in force. In negotiating an exit from
may increase our cost base, reduce the EU, there is also the risk that
our future revenues and impact proposals have unintended consequences
profitability or require us to for the operation of the UK financial
hold more capital. The prominence services sector. With regard to existing
of the risk increases where change UK regulation, alongside the PRA ensuring
is implemented without prior engagement the effective operation of Solvency
with the sector. The nature of II and an on-going requirement upon
long-term business can also result Legal & General to ensure compliance
in some changes in regulation, with the new regulatory framework,
and the re-interpretation of regulation the FCA continues to focus on its approach
over time, having a retrospective to consumer regulation, and there remain
effect on our in-force books of challenges in ensuring that regulatory
business, impacting the future interpretation of rules is proportionate
cash generation. and cost effective and align with businesses
that are becoming increasingly digital.
The FCA programme of thematic reviews
of industry practices may also lead
to additional business remediation
costs, and we cannot completely eliminate
the risk that historic accepted practices
may be reappraised by regulators, resulting
in sanction against the Group. We remain
vigilant to the impacts of future legislative
and regulatory change, internally preparing
our businesses for known factors, and
externally seeking to engage with government
and regulatory bodies in the UK and
Europe so as to develop outcomes that
meet the needs of all stakeholders.
New entrants may disrupt the landscape We are executing a digital strategy,
of the markets in which we operate. using platforms that allow for growth
As has been seen in other business and high scale. We continue to enhance
sectors, it is possible that alternative our online capabilities for auto-enrolment,
digitally enabled providers of investment platforms and individual
financial service products emerge retirement products ensuring focus
with lower cost business models on customer engagement and the digital
or innovative service propositions experience. We recognise there is potential
and capital structures disrupting for entry into our markets by scale
the current competitive landscape. overseas competitors who may have lower
return on capital requirements and
be unconstrained by Solvency II.
A material failure in our business Our plans for growth together with
processes may result in unanticipated the regulatory change agenda inherently
financial loss or reputation damage. increase the profile of operational
We have constructed our framework risks across our businesses. We continue
of internal controls to minimise to invest in our system capabilities
the risk of unanticipated financial and business processes to ensure that
loss or damage to our reputation. we meet the expectations of our customers;
However, no system of internal comply with regulatory, legal and financial
control can completely eliminate reporting requirements; and mitigate
the risk of error, financial loss, the risks of loss or reputational damage
fraudulent actions or reputational from operational risk events. We recognise
damage. however, that residual risk will always
remain and have designed our risk governance
framework to ensure that when adverse
events occur we can deploy appropriate
responses.
The financial services sector is The financial services sector remains
increasingly becoming a target a target for those who seek to exploit
of 'cyber crime'. perceived vulnerabilities in IT systems.
As we and our business partners Potential threats continue to evolve
increasingly digitalise our businesses, but include denial of service attacks,
we are inherently exposed to the network intrusions to steal data for
risk that third parties may seek the furtherance of financial crime,
to disrupt our online business and the electronic diversion of funds.
operations, steal customer data We are focused on maintaining a robust
or perpetrate acts of fraud using and secure IT environment. Working
digital media. A significant cyber with our business partners, we seek
event could result in reputational to ensure the security of our systems
damage and financial loss. with proactive responses to emerging
threats. However, the evolving nature
of cyber threats means that residual
risks will always remain.
ENQUIRIES
Investors:
Laura Doyle Head of Investor Relations 020 3124 2088
Sujee Rajah Investor Relations Manager 020 3124 2047
Media:
Richard King Head of Group Corporate Communications 020 3122
095
Doug Campbell 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
10.00am UK time today at One Coleman Street, London, EC2R 5AA.
There will be a live webcast of the presentation which can be
accessed at
http://www.legalandgeneralgroup.com/investors/results2016.html 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 FROM NUMBER YOU SHOULD DIAL
UNITED KINGDOM 020 3059 8125
UNITED STATES (TOLL FREE) 1 855 287 9927
ALL OTHER LOCATIONS +44 20 3059 8125
2016 Financial Calendar Date
Ex-dividend date 18(th) August
2016
Record date 19(th) August
2016
Payment date of 2016 interim dividend 22(nd) September
2016
DEFINITIONS
Definitions are included in the Glossary.
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.
GOING CONCERN STATEMENT
The Group's business activities, together with the factors
likely to affect its future development, performance and position
in the current economic climate are set out in this Interim
Management Report. The financial position of the Group, its cash
flows, liquidity position and borrowing facilities are described in
the Group Results. Principal risks and uncertainties, including the
additional market uncertainty caused by the UK decision to exit the
EU, are detailed above. In addition, the financial statements
include, amongst other things, notes on the Group's objectives,
polices and process for managing its capital; its financial risk
management objectives; details of its financial instruments and
hedging activities; and its exposures to credit and liquidity
risk.
In the period leading up the EU referendum and the days
subsequent there has been significant market uncertainty and
volatility. The Group manages and monitors its capital with various
stresses built in to understand the expected impact of market
downturns. These stresses do not give rise to any material
uncertainties over the ability of the Group to continue as a going
concern and therefore, based upon the available information, the
directors consider that the Group has the plans and resources to
manage its business risks successfully as it has a diverse range of
business and remains financially strong.
Having reassessed the principal risks, the directors considered
it appropriate to adopt the going concern basis of accounting in
preparing the interim financial information.
DIRECTOR'S RESPONSIBILITY STATEMENT
We confirm to the best of our knowledge that:
i. The consolidated interim financial statements have been
prepared in accordance with IAS 34 Interim Financial Reporting as
adopted by the European Union;
ii. The interim management report includes a fair review of the
information required by DTR 4.2.7, namely an indication of
important events that have occurred during the first six months of
the financial year and their impact on the consolidated interim
financial statements, as well as a description of the principal
risks and uncertainties faced by the company and the undertakings
included in the consolidation taken as a whole for the remaining
six months of the financial year;
iii. The interim management report includes, as required by DTR
4.2.8, a fair review of material related party transactions that
have taken place in the first six months of the financial year and
any material changes in the related party transactions described in
the last Annual Report and Accounts; and
iv. The directors of Legal & General Group Plc are listed in
the Legal & General Group Plc Annual Report and Accounts for 31
December 2015, with the exception of John Stewart who retired as
non-executive director and chair on 1 June 2016 and Olaf Swantee
who retired as non-executive director on 26 May 2016. Lesley Knox
joined the Board as non-executive director on 1 June 2016 and
Philip Broadley joined the Board as non-executive director on 8
July 2016. A list of current directors is maintained on the Legal
& General Group Plc website: legalandgeneralgroup.com.
By order of the Board
Nigel Wilson Mark Gregory
Group Chief Executive Group Chief Financial Officer
8 August 2016 8 August 2016
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR AKFDBPBKDAFK
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