2022 Results: Operating profit up 12% to £2.5bn, EPS up 12% to 38.3p, ROE of 21% and Solvency coverage of 236%

Strong financial performance[1]

·    Operating profit of £2,523m, up 12% (2021: £2,262m)

·    Profit after tax[2] of £2,291m, up 12% (2021: £2,050m)

·    EPS of 38.33p, up 12% (2021: 34.19p)

·    Return on equity of 20.7% (2021: 20.5%)

·    Solvency II coverage ratio of 236% (2021: 187%)

·    As at 3^rd March 2023 we estimate the coverage ratio was 240%[3]

·    Full year dividend of 19.37p, up 5% (2021: 18.45p), consistent with our ambition

On track to achieve our five-year (2020-2024) ambitions[4]

·    Cash generation of £1.9bn, up 14%. Capital generation of £1.8bn, up 10%

·    Cumulative cash and capital generation on track with strong dividend headroom. To date:

‒   Cash generation of £5.1bn and capital generation of £4.9bn (£8.0-9.0bn by 2024)

‒   Dividends of £3.3bn (£5.6-5.9bn by 2024)

‒   Net surplus generation[5] over dividends of £0.7bn

Good new business volumes and rapidly increasing international presence

·    Global PRT new business premiums of £9.5bn (2021: £7.2bn), of which 23% international

·    LGC alternative AUM up 21% to £4.2bn (2021: £3.4bn), of which 12% international

·    LGIM AUM of £1.2tn, of which £441bn (37%) international

·    LGIM external net flows of £49.6bn (2021: £34.6bn), of which 43% international

·    Protection gross premiums up 8% to £3.1bn (2021: £2.9bn), of which 39% international

"We have delivered another strong result in 2022, ahead of market expectations, with operating profit of £2.5bn and EPS of 38.3p, both up 12%, cash generation of £1.9bn up 14%, capital generation of £1.8bn up 10%, dividends up 5% to 19.37p and an ROE of 21%. Our diversified and highly synergistic business model continues to deliver significant benefits. Our balance sheet is strong and highly resilient, with a record solvency ratio of 236% and we have once again received 100% of cash flows due from our Direct Investments. At a time when many households are being affected by the rising cost of living, our commitment to inclusive capitalism is more important than ever to help improve the lives of our customers, build a better society for the long-term and create value for our shareholders."

Sir Nigel Wilson, Group Chief Executive

Financial summary

2022 Financial performance

Income statement

Legal & General's diversified business model has delivered a record set of results and resilient balance sheet, with operating profit up 12% to £2,523m (2021: £2,262m).  All four divisions are well positioned to execute on compelling structural market opportunities and collectively to deliver profitable growth over the medium and long-term.

LGRI operating profit increased by 9% to £1,257m (2021: £1,154m) underpinned by the growing scale of backbook earnings and the consistent performance of our annuity portfolio.  LGRI also maintained pricing discipline and executed at higher volumes to address growing demand, writing £9,541m of global PRT (2021: £7,176m) at attractive Solvency II new business margins (8.9%)[9], which is in line with our long-term average. 

LGC operating profit increased by 10% to £509m (2021: £461m) driven by strong performance in our alternative asset portfolio, where operating profit increased to £400m (2021: £350m).  Our diversified, multi-tenure housing portfolio has delivered another set of strong results, driven by Cala.  Science and technology infrastructure investments through our Bruntwood SciTech joint venture (JV) and Urban regeneration projects such as Sky Studios in Borehamwood continue to generate attractive returns.  Our Alternative Finance business (Pemberton) also continues to perform strongly. 

LGIM delivered lower operating profit of £340m (2021: £422m) primarily due to the impact of market movements on assets under management, which decreased by £225bn to £1,196bn since the start of the year.  External net flows remained strong, increasing by 43% to £49.6bn (2021: £34.6bn).  43% of these flows were from international clients, and we have seen continued growth in higher margin areas such as thematic ETFs and multi-asset.  However, the positive impact of these higher margin flows has been offset by Defined Benefit flows, with clients selling higher fee-generating products to meet collateral requirements.  The impact of inflation and market movements, alongside lower revenues, increased the cost income ratio to 65% (2021: 58%).  We are carefully balancing cost control with selective ongoing investment to modernise, diversify and internationalise LGIM.

Retail operating profit increased by 33% to £825m (2021: £620m).  Our US life insurance business saw a return to profit, driven by robust new business volumes and the benefit from reinsuring the in-force universal life book.  After significant Covid mortality experience over Q1 2022, the market continued to see elevated levels of mortality over the year, leading to claims exceeding the provision raised at FY 2021.  The retail retirement business delivered strong new business volumes in addition to a significant prudence release from updating base mortality assumptions, and our Fintech business benefitted from valuation uplifts following successful fundraising in Salary Finance and Smartr365 over 2022.

Group costs were elevated compared to prior year, driven by the IFRS 17 programme and related workstreams. 

Profit before tax attributable to equity holders[10] increased by 7% to £2,659m (2021: £2,488m) reflecting a strong operating result and positive investment variance of £137m (2021: £233m).  The key drivers of this positive investment variance are from the formulaic impact of rising interest rates on insurance reserves, partially offset in LGC by global equity market falls and the revaluation of some land assets and development projects as a result of higher interest rates.

Balance sheet and asset portfolio

The Group's Solvency II operational surplus generation was up 10% at £1,805m (2021: £1,636m).  New business strain was £(352)m (2021: £(354)m) resulting in net surplus generation of £1,453m (2021: £1,282m).  UK PRT volume was written at a capital strain of less than 4% and we achieved self-sustainability on the UK annuity portfolio again, as we did in 2020 and 2021.    

The Group reported a Solvency II coverage ratio[11] of 236% at the end of 2022 (FY 2021: 187%) which, in addition to the contribution from net surplus generation, reflects the impact of market movements, principally from the non-economic impact of higher interest rates on the valuation of our balance sheet[12], partially offset by payment of the 2021 final and 2022 interim dividend (£1,116m).

Our IFRS return on equity of 20.7% reflects the impact of operating profit growth and positive investment variance (2021: 20.5%).[13]  Book value per share has increased by 11% to 194p.

Our diversified, actively managed annuity portfolio has continued to perform resiliently with no defaults.  The annuity portfolio's direct investments continue to perform strongly, with 100% of scheduled cash-flows paid in 2022, reflecting the high quality of our counterparty exposure.

Group Strategy

Legal & General has established expertise in asset origination (LGC) and asset management (LGIM), and in the provision of retirement and protection solutions to corporates and individuals (LGRI and Retail).  We operate at scale and are strongly positioned to capitalise on significant growth opportunities across our chosen markets through these four divisions:

A powerful business model

We have a unique and highly synergistic business model, which continues to drive our strong return on equity.  Legal & General provides powerful asset origination and management capabilities directly to clients. These capabilities also underpin our leading retirement and protection solutions:

·    LGRI is a market leader in UK PRT and a top ten player in the US PRT market, with annuity assets of £55bn.[14]  It provides long-term, captive AUM to LGIM.  As noted, the annuity portfolio is continually being enhanced through the supply of alternative assets originated by LGC. 

·    LGC invests across four main asset classes (Specialist Commercial Real Estate, Clean Energy, Housing and SME Finance) to generate attractive risk-adjusted shareholder returns and to create alternative assets with which to back our annuity portfolio.  LGC is also increasingly attracting third party capital investment directly, and through collaboration with LGIM, to meet the growing client demand for alternative assets.

·    LGIM is a leading global asset manager, ranking 11^th in the world[15] with £1.2tn of AUM of which £441bn, or 37%, are international assets.  LGIM is a leading provider of UK and US Defined Benefit (DB) de-risking solutions.  It is uniquely positioned to support DB clients across the full range of pension endgame destinations, including PRT with LGRI.  77% of LGRI's PRT transactions over the past three years were from existing LGIM clients.[16]  LGIM is also the market leader in UK Defined Contribution (DC) pension scheme clients with DC AUM of £135bn - the leading player in a market with significant growth potential, with total UK DC assets expected to surpass £1.2tn by 2031.[17]

·    Retail is a leading provider of UK retail retirement and protection solutions, and US term life insurance. The UK retail retirement business offers Workplace Savings, annuities, income drawdown and lifetime mortgages (LTM).  Our UK and US insurance businesses generate day one surplus capital which partially offsets annuity new business strain.  Retail is also an internal centre of excellence in technology, and manages a portfolio of successful, strategic Fintech business investments.

The synergies within and across our businesses drive profits and fuel future growth.

The integrated nature of our business model means we have relationships with clients and customers that can and do last for decades.  A corporate client in LGIM typically becomes a PRT client after 14 years.  LGRI will then typically have a relationship with that client for another 30 to 40 years.  Equally, Retail Retirement and LGIM may have a 30-40 year relationship with a customer during the DC accumulation phase, and then extend that relationship for another 15-30 years during the decumulation phase across a suite of decumulation products including individual annuities, lifetime mortgages and drawdown.

The Group continues to build out, in a measured fashion, its international retirement solutions franchise.  We have made excellent progress in the US over the last decade and will continue to grow our established businesses (LGRI, LGIM, Retail) in that market. LGIM continues to make good progress against its international expansion plans in the US, Europe and Asia.  Kerrigan Procter is co-ordinating the Group's expansion plans in Asia building on the $150bn of regional assets already under management.

A long-term commitment to Sustainability and Inclusive Capitalism

Our purpose is to improve the lives of customers, build a better society for the long-term and create value for our shareholders. This inspires us to use our assets in an economically, environmentally and socially useful way to benefit society - what we call Inclusive Capitalism.  At a time when many in society are facing increasing economic hardship, we believe Inclusive Capitalism matters more than ever.

Our philosophy underpins our approach to sustainability.[18] We think about sustainability in terms of:

·    How we invest proprietary assets.[19]  Our ambition is to reduce our group investment portfolio economic carbon intensity by half by 2030 and to net zero carbon by 2050.  In 2022, our group investment portfolio economic carbon intensity fell by 5% versus 2021, through a combination of market movements, partially offset by a muted emissions increase as business activity increased.  While the reduction of 23% from 2019 is ahead of our 2022 target, we may still see further volatility from future global events - as experienced through the pandemic and the ongoing conflict in Ukraine - and therefore remain focused on delivery of our mid-to-long-term decarbonisation targets.  We continue to make environmentally and socially useful investments.  As at FY 2022, we have invested £1.3bn in clean energy and £8.3bn in social infrastructure.  For more information, please see our latest Climate Report, compliant with recommendations by the Task Force on Climate-related Financial Disclosures (TCFD), and our latest Social Impact Report, which describes our activity in investing for positive social, economic and health outcomes.[20]

·    How we influence as one of the world's largest asset managers with £1.2 trillion AUM.  We have £332.2bn AUM in ESG strategies and in 2022 our investment stewardship team engaged with around 900 companies, holding them to account on the issues that matter most to our clients.[21]^,[22]  LGIM is proud to have received a 5 star ranking from the UN Principles for Responsible Investment (UN PRI) for investment stewardship and policy, and to have scored over 75% in each section of the latest UN PRI report.[23]  In addition to being among the highest rated managers for engagement by FinanceMap, LGIM has also been highlighted by MajorityAction for its approach to holding companies to account on climate change.

·    How our businesses operate.  We are committed to supporting our customers, employees, suppliers, shareholders and society at large.  In the current economic environment, we recognise that support is more critical now than ever.  For information on how we are supporting our stakeholders, please see our Social Impact report.¹²  We have committed to reducing the carbon emission intensity of our operating businesses.  Our ambition is to operate our offices and business travel with net zero emissions from 2030, and for all our new homes to be net zero operational carbon from 2030.  ESG criteria are included in executives' objectives and remuneration schemes.

CEO retirement and succession plans

Sir Nigel Wilson has informed the Board of his decision to retire from executive life.  He joined Legal & General as Chief Financial Officer in 2009 and was appointed as Chief Executive in 2012.

Since Sir Nigel joined Legal & General, the Group has delivered a consistently strong financial performance with a total shareholder return of over 600% driven by significant growth in dividends, earnings per share and ROE. During his time as Chief Executive, Sir Nigel has executed numerous strategic initiatives to grow and re-focus the business, consistently exceeding financial and operational targets while also ensuring Legal & General has delivered Inclusive Capitalism with positive outcomes for shareholders, customers and the broader economy.

The Board has commenced a rigorous process to appoint a successor, considering both internal and external candidates.  Sir Nigel has agreed to continue as Chief Executive until the new Chief Executive starts and he will support a smooth transition following their appointment. It is envisaged that this process will take up to a year.  In the meantime, Sir Nigel will continue to focus on delivering the Group's strategy, supported by the executive team.

Current Trading Update

We have made a good start to the year: 

·      LGRI: There has been a step-up in the number of pension schemes approaching the insurance market, with market movements in 2022 having generally increased funding levels and accelerated the ability of many pension schemes to de-risk.  As a result, we currently have a strong global pipeline across all of our key markets.  We remain well placed to achieve our volume ambitions.

·      LGIM: We have started 2023 with further positive flows across higher margin areas, including Defined contribution and Wholesale.  Our international progression continues, with positive flows in Japan and the US.  We continue to work with our UK Defined Benefit clients to support them in repositioning their strategies in a higher interest rate environment.

·      LGC: Our Housing portfolio has made a good start to the year against a tougher backdrop.  Cala has completed 200 sales with reservations on private units at 41% of the target for the year.  Whilst this is slightly below last year's exceptional start to the year, it is in line with previous years.  Our most recent Build to Rent developments have also let far quicker than expected.  Pemberton has raised $1bn for its Working Capital Finance strategy, and will invest in receivables, payables and inventory financing for US and European large and mid-market companies.  The Specialist commercial real estate portfolio has also made a good start to the year with two planning applications accepted for Ancora L&G in the US and progress made across the Oxford portfolio, notably with developments in our Begbroke Science Park.

·      Retail: In Retirement, we have seen a continuation of higher demand for individual annuities due to higher rates on offer and an increased demand for fixed term annuities, with total annuity volumes of c£196m at end February, 43% higher than the prior year, and lifetime mortgage advances of £40m.  US Protection new business is up 32% on the prior year, with volumes of c$28m.  UK protection new business is down on prior year with total volumes of c£40m, predominantly due to fewer large Group Protection schemes coming to market.

Our solvency ratio as at 3^rd March 2023 was 240%.

Outlook

Confident in achieving our ambitions; well-positioned to deliver long-term profitable growth

Our strategy has delivered strong returns for our shareholders over time. It demonstrated resilience through the pandemic and positions us well to navigate - and even benefit from - the prevailing market environment. We are confident we can continue to deliver profitable growth as we execute on our strategy. 

We set out five-year ambitions at our Capital Markets event in November 2020.  Cumulatively, over the period 2020-2024, our financial ambitions[24] are for:

·    Cash and capital generation (of £8.0bn - £9.0bn) significantly to exceed dividends (of £5.6bn - £5.9bn)[25]

·    Earnings per share to grow faster than dividends, with the dividend growing at 5% to FY 2024

·    Net capital surplus generation (i.e., including new business strain) to exceed dividends

We made further progress against these ambitions in 2022 and remain confident in achieving them.  In 2022, we have achieved 14% growth in cash generation and 10% growth in capital generation.  From the start of the ambition period to FY 2022, we have achieved £5.1bn of cash generation and £4.9bn of cumulative capital generation, and declared £3.3bn of dividends.  Even zero growth in cash and capital generation from now to 2024 would still see us meet our ambition of generating £8.0 - £9.0bn in cumulative cash and capital.  Moreover, the jaws between net capital surplus generation and the dividend are widening, providing attractive capital optionality.  From the start of the ambition period to FY 2022 we have generated £0.7bn of cumulative net surplus over the dividend.  

We aim to deliver long-term, profitable growth across the Group.  Our annuity portfolios generate highly predictable, stable cash flows from their growing back-books, and we are well positioned to help meet the rapidly growing demand for global PRT.  Our asset origination and asset management businesses, LGC and LGIM, operate in attractive and profitable markets, and maintain a strong commitment to sustainable investing.  LGC provides unique asset origination capabilities in sectors that have significant growth potential and which produce yield-creating assets that drive our annuity business and which appeal to third party investors (e.g. specialist commercial real estate, clean energy, housing and SME finance).  LGIM offers a range of investment solutions for institutional and wholesale clients and is expanding geographically and into new channels.  Retail is applying technological innovation to sustain its UK leadership position, to grow in the US and to continue to expand into adjacent markets. 

We remain highly confident in our strategy and in our ability to deliver resilient, organic growth, supported by our strong competitive positioning in attractive and growing markets.  Our confidence in our dividend paying capacity is underpinned by the Group's strong balance sheet, which has Solvency II surplus regulatory capital of £9.9bn, providing significant capacity to absorb a market downturn.  We have a proven operating model which is reinforced by robust risk management practices.

We are pleased with the further progress we have made in 2022 and are confident in our ability to deliver further profitable growth going forwards.  Our Inclusive Capitalism approach enables us to support the UK's twin policy objectives of "Levelling Up" and "Addressing Climate Change". 

We will continue to maintain a defensive and diversified asset portfolio and a long-term investment horizon, supporting all our stakeholders by delivering Inclusive Capitalism through investments - both for our own portfolio and for clients - in areas such as infrastructure, clean energy and affordable housing, and by providing products to support individuals' financial resilience.

Business segment outlook

Legal & General Institutional Retirement (LGRI)

LGRI participates actively in the global pension risk transfer (PRT) market, focusing on corporate defined benefit (DB) pension plans in the UK, the US, Canada, Ireland and the Netherlands, which together have more than £6 trillion of pension liabilities. 

We write direct business in both the UK and US and are top-tier providers in both markets.  We are supported by LGIM's long-standing client relationships and investment capabilities as well as LGC's asset origination capabilities.  We are now beginning to leverage LGC investments in the US and continue to enhance our asset strategy and product innovation, commercialising the wide-ranging skills accessible across the Group.  Our A minus rated global annuity asset portfolio is well-managed and diversified across sector and region (46% UK, 54% international).  In 2022, 57% of our UK transactions were with LGIM clients, demonstrating the continued strength of our client relationships and the competitive advantage provided by our unique position as the only firm operating across the full pension de-risking journey.

The UK is our primary market and is the most mature PRT market globally with £1.4 trillion of UK DB pension liabilities, of which an estimated c14% has been transferred to insurance companies to date.[26]  The addressable market therefore remains significant.  At the same time, demand for PRT is growing as rising interest rates and widening credit spreads reduce pension deficits and allow more funds to consider de-risking.  Leading advisers such as LCP are bullish on the prospects for PRT in 2023 and beyond.[27]  We are strongly positioned to capitalise on this opportunity. 

Our stated ambition is to write circa £8-10bn of UK PRT per annum.  We have demonstrated that this level of new business is self-sustaining, i.e. the growing amount of capital generated by our in-force UK annuity book more than offsets both the capital investment required to fund new business and the portfolio's contribution to our progressive Group dividend.  The UK annuity portfolio achieved self-sustainability in 2020, 2021 and 2022.  Over this period, Group net surplus generation has exceeded dividends by a total of £0.7bn, equivalent to approximately two additional years of new business strain.

We increasingly regard our ambition of writing £8-10bn of UK PRT per annum as "business as usual" and have demonstrated that this level of new business is self-sustaining.  There may well be opportunity to bid on additional large, or very large, PRT transactions over the coming years.  We are well positioned and have appetite to write this additional business, subject to it delivering on our key new business metrics.  We will consider any large incremental transactions as "M&A"-type activity, funding it from our strong stock of solvency capital as required.

The US represents another significant market opportunity, with $3.0 trillion of DB liabilities, of which an estimated c9% have transacted to date.[28]  Since our market entry in 2015, our US business has completed 95 transactions and written $8.4bn of business.  As in the UK, demand for PRT is growing: we estimate the total US PRT market increased 39% to $53bn in 2022 (FY2021: $38bn).[29]  LGRI is the only insurer providing PRT directly to pension plans in both the UK and US, and we actively quote on select Canadian and Irish PRT opportunities as well.  In the Netherlands, proposed pension reform legislation could result in significant PRT business coming to market over the next 3-4 years.  We continue to actively monitor the market with a view to potential participation.

Our ambition is to write at least $10bn of international PRT over the five years from 2020-2024. We have written $5.5bn of International PRT from 2020 to date, with premiums growing over this period by c30% per annum. We expect sales to continue to grow and are confident of meeting our ambition.

Legal & General Capital (LGC)

LGC, the Group's alternative asset origination platform, will continue to deploy shareholder capital in a range of underserved areas of the real economy which are backed by long-term structural trends.  LGC has three fundamental objectives: 1) profit and value generation within LGC for shareholders; 2) asset creation to back LGRI and Retail annuity liabilities and to meet demand from like-minded investors; and 3) a focus on high-return sustainability and ESG investments, securing long lasting value for shareholders and society.  

LGC is making good progress in internationalising its business model, announcing its first US investment projects with joint venture partner Ancora in 2022.

As communicated at the LGC capital markets event in October 2021, our ambition is to build LGC's diversified alternative AUM to c£5bn by 2025 (2022: £4.2bn), with a blended portfolio return target of 10-12% (previously 8-10%).  In combination with the contribution from the Traded Portfolio, LGC's ambition is to deliver operating profit of £600-700m in 2025.  Additionally, we plan to increase third party capital to £25-30bn (2022: £16.6bn).  We expect our existing platforms (Pemberton, NTR) to underpin our ambitions for third party AUM, building on their impressive growth to-date, although we also anticipate growing contributions from Clean Energy, Later Living, Data Centres and US science and technology infrastructure opportunities via Ancora L&G, alongside wider internationalisation efforts.  Excluding assets originated to back our annuity liabilities, LGC expects to invest and manage over £30bn of alternative AUM by 2025. 

LGC's asset classes, which include specialist commercial real estate, housing, clean energy and SME Finance, have all been selected given the long-term need for capital in these sectors, and provide us with compelling opportunities to create high-yielding assets. 

·      The Specialist Commercial Real Estate (SCRE) portfolio includes urban regeneration (primarily funded by LGRI) and science and technology-focused real estate in the UK through Bruntwood SciTech and more recently in the US, through Ancora L&G.  Partnering with universities, local authorities and private sector experts, we have invested across twenty-two towns and cities in the UK and two in the US, creating jobs, driving economic growth and revitalising local communities. Our SCRE portfolio also includes an increasing focus on Digital Infrastructure, which is critical for both corporations and governments. State of the art data centres are central to meeting this need, and data management is one of the fastest growing sectors from a structural perspective.  Our investment has given LGC the opportunity to strategically diversify its portfolio whilst enabling social and financial inclusion as we level up cities and unlock productivity growth on a global basis. 

·      In the Clean Energy sector, we are focused on investing selectively into attractive growth equity and low carbon infrastructure opportunities.  We are confident that our selective approach to clean energy investing will continue to yield positive results.  With a focus on meeting increasing societal demand, growth equity investments include early-stage scale-up companies that deliver innovative clean technologies, and low carbon infrastructure investments target renewable energy sources.

·      As a leading provider of UK homes, committed to tackling the affordability gap and the undersupply of housing (estimated to be around 450,000 homes required annually), LGC's Housing platform continues to expand across all tenures and demographics, and we are well positioned to scale in support of our long-term ambitions.  Whilst 2023 presents a more challenging outlook for housing due to increases in cost to the consumer, our multi-tenure approach provides opportunity to grow our portfolio.  We will continue to invest thoughtfully through the cycle, benefitting from our large stock of patient capital waiting to be deployed.

·      In SME Finance, we are continuing to support UK and European innovation through two key platforms.  Firstly, through our GP Investing platform and aligned to our strategy to invest in socially and economically useful enterprises, we continue to work alongside ambitious, ESG-oriented alternative asset managers.  Since 2020, Pemberton (where we hold a 40% stake) has doubled its revenues from c€50m to c€100m in 2022, driven by Direct Lending which continues to be core to Pemberton's strategy.  And secondly, through our Venture Capital Platform where we continue to invest in the real economy and technological innovation.  The Venture Capital platform now supports over 600 companies through our investments.

Our alternative asset strategies represent Inclusive Capitalism at work - generating long-term value for society and shareholders.  Through our investments, we are creating much needed jobs, homes, and infrastructure, driving growth, skills and innovation, and contributing towards a cleaner and greener future.

Legal & General Investment Management (LGIM)

LGIM is a global asset manager with a diversified asset and client base, underpinned by clear structural demand for our capabilities.  As the asset manager for the Group, LGIM plays a core part in L&G's successful synergistic business model, including creating a pipeline of fully-funded DB pension schemes for LGRI, the origination and management of assets for the annuity portfolio, and access to distribution for LGC's alternative asset creation platform.

Our purpose is to create a better future through responsible investing, and we are a global leader in ESG.  LGIM is one of the largest managers of corporate pension funds globally.  We are a UK leader in Defined Benefit (DB) pensions, the UK's number-one Defined Contribution (DC) manager and we manage assets for 4 of the 5 largest corporate pension schemes in the US.  We intend to maintain our strong position in the UK, which has been the bedrock of our success to date, while continuing to broaden our reach internationally.  We will diversify our active, index and solutions capabilities, building on our strength in fixed income and real assets, and on our heritage in ESG. 

2022 was a profoundly challenging year for all asset managers. The market environment shifted fundamentally, with interest rates up significantly, inflation hitting double digits in many developed economies and global equity markets falling substantially.  As a consequence, LGIM's assets under management declined over 2022, with closing AUM of £1,196bn compared to average AUM for the year of £1,309bn, notwithstanding positive net flows of £47bn.  We remain confident, however, that LGIM will continue to make an important profit and cash contribution to the Group, despite the lower opening asset position in 2023.

The three pillars of our strategy are to modernise, diversify and internationalise.  We are investing in our people, our operating platform and our data capabilities and are currently implementing a transformation of our strategic operating model to build a globally scalable investment and middle office platform and to deliver excellent client service.  We are selectively expanding our investment offering, with a focus on higher-margin product areas such as Real Assets, ETFs, Multi-asset and Fixed Income, and we are increasingly integrating ESG into our investment portfolios.  LGIM aims to be an innovator in those countries where our strengths align to client needs.  Our ambition is to continue to grow International AUM profitably and at pace in the US, Europe and Asia.  Over the last five years, LGIM's international AUM has more than doubled to reach £441bn - 37% of the total. 

Legal & General Retail Division (Retail)

Insurance

We will continue to leverage our technological innovation, operational strength and scale efficiencies to offer market leading product offerings.  Our data and tech-led strategy makes our products more accessible to customers and supports further product and pricing enhancements. 

In the UK, our market leading retail protection business is supported by our strong distribution relationships, investment in our systems and platforms, and product enhancements, leading to robust delivery in 2022.  In 2023, we expect the retail protection market to be impacted by a softer housing market and by affordability considerations for consumers.  Our group protection business has performed well, increasing premium income by 5% to £427m (2021: £405m).  Our medium-term ambition remains unchanged.  We continue to target mid-single digit growth in revenues across our UK protection businesses to 2025. 

In the US, we anticipate our ongoing technology investments and new partnerships will position us for premium growth.  We are using technology to improve customer experience while reducing cost to become the partner of choice for a wide range of distribution partners.  We are already the largest provider of term life assurance in the brokerage channel[30], and our digital first approach is aiming to achieve, on average, double digit growth in new business sales to 2025.

Retirement

Workplace savings is a core part of the Group's retail proposition.  The business is a growth area for the Group and we expect the market to continue to expand, driven by ageing demographics and welfare reforms.  Our core focus is on better assisting our 4.96 million Workplace members to plan for their retirement whilst they are saving with us, as well as when they come to retirement.  This will drive better customer outcomes and, at the same time, help us to retain more of our customers in retirement. Despite consumer pressures, member contributions have remained strong over 2022 and we've not yet observed any material changes in customer activity as a result of increases in the cost of living.  

There are currently c£600bn in UK Defined Contribution (DC) accumulation assets and this is expected to more than double over the next ten years.[31]  As a market leading provider in Workplace Savings, we are well placed to benefit from this expected increase in DC pension assets, and to grow administration revenues for the Retail division and fund management revenues for LGIM.

The amount of DC assets coming to maturity each year has increased to c£45bn following the dip that was seen during the pandemic when customers deferred making retirement decisions.  Similarly, and as noted, the annuity market is also showing signs of recovery as the interest rate rises make the cost of an annuity cheaper.  Retail Retirement has a strong market share in individual annuities - 20.3% over 2022[32] and an external market share of 36.3%²⁴ - and continues to explore and develop new product ideas to meet the needs of people reaching retirement.  

The UK lifetime mortgage (LTM) market continues to represent a sizeable opportunity, with UK housing equity in over 55s at £2.6 trillion.[33]  This year c£6bn per year was released through the LTM market.  However, we anticipate a challenging market in 2023 given the prevailing interest rate environment.  We continue to remain disciplined on pricing to deliver assets that add value to our portfolio to back our long-term annuity liabilities.

Across all our Retail businesses we continue to focus on our customers, with a particular focus on the technology that supports providing a more efficient and more personalised service.

Fintech

There are a wide range of technology startups creating new financial services businesses harnessing technology and data to deliver better customer outcomes and successful business models. With our market insights, relationships and expertise, we are well positioned to accelerate growth and scale up Fintechs in adjacent markets, which can also assist us in accelerating our own strategic growth areas.

We have been making strategic investments in adjacent market Fintechs for many years including adding three new investments during 2022.  Our current portfolio of eight Fintechs has been growing fast, with valuation uplifts in both Salary Finance and Smartr365 following successful rounding rounds over 2022.  Over the coming years we expect continued growth in revenues and customer numbers:  We are targeting double digit growth to 2025 for our Fintech businesses.  

Dividend

The Board has approved a slight amendment to the Group's dividend policy to reflect the fact that we will no longer be producing "Net release from operations" under IFRS 17.  Accordingly, and to reflect the importance of solvency capital generation as a critical measure of dividend sustainability, the dividend policy will substitute "Net release from operations" with "Capital generation".

Henceforth the Group's dividend policy states: "We are a long-term business and set our dividend annually, according to agreed principles.  The Board's intention for the future is to maintain its progressive dividend policy, reflecting the Group's expected medium-term underlying business growth, including measurement of Capital generation and Adjusted operating profit."

The Board has recommended a final dividend of 13.93p, giving a full year dividend of 19.37p, up 5% from the prior year (18.45p).  This is consistent with our stated ambition to grow the dividend at 5% per annum to FY 2024.[34]

LGR - Institutional

1.             In the UK, annuity assets across LGRI and Retail are managed together. Estimated proportion of annuity assets belonging to LGRI

Operating profit of £1,257m

LGRI delivered strong operating profit of £1,257m, up 9% (2021: £1,154m).  Profit was underpinned by the scale of backbook earnings, performance of our global annuity portfolio, robust pension risk transfer (PRT) new business volumes and routine assumption changes.  UK volumes increased 17% to £7.3bn (2021: £6.2bn) and international volumes increased 137% to £2.2bn (2021: £0.9bn).

We have prudently adopted a modified CMI 2020 model, releasing a modest positive into the results.  No weight was given to 2020 data, as this would have led to unreasonable falls in life expectancy, given the significant impact of Covid. 

Release from operations increased 21% to £620m (2021: £512m), reflecting the scale of the business as prudential margins unwind from LGRI's £55.0bn annuity portfolio (2021: £67.4bn). 

Net release from operations was £918m (2021: £705m) with new business surplus of £298m (2021: £193m), reflecting successful execution of our disciplined approach to writing new business, leveraging positive asset sourcing and proactive use of reinsurance.  During 2022, we wrote £7,319m of UK PRT at a UK Solvency II new business margin of 8.9%, which is in line with our long-term average (2021: 9.5%).  UK PRT volumes were written at a capital strain of less than 4%.

Gross longevity exposure was £69.7bn across LGRI's and Retail's annuity and longevity insurance businesses. We have reinsured £32.3bn of longevity risk with seventeen reinsurance counterparties, leaving a net exposure of £37.4bn.  The reinsurance market continues to grow and innovate, and we expect it to continue to offer sufficient capacity to meet the demand from insurers.

Successful execution coupled with a disciplined approach for value

During 2022 LGRI underwrote £9,541m of business across 61 deals globally (2021: £7,176m, 57 deals). 

Legal & General wrote strong levels of PRT new business whilst remaining focused on value creation. 

LGRI's brand, scale and asset origination capabilities - through synergies and expertise within LGIM and LGC - are critical to our market leadership in the UK PRT market.  Long-term client relationships, typically created and fostered by LGIM, have allowed us to help many pension plans achieve their de-risking goals.  In 2022, we demonstrated our market leadership and solutions capabilities by writing a series of innovative transactions, including:

·    A £4.3bn buy-in with the British Steel Pension Scheme (BSPS), sponsored by Tata Steel UK, executed in two tranches (£2.2bn in May and £2.1bn in December).  These transactions bring L&G's total insured amount to 60% of BSPS liabilities, up from 5% in 2021.  The BSPS trustee appointed LGIM in July 2022 to manage the combined assets of the scheme and bring additional skills and expertise to the scheme as it targets full buy-in[35]

·    c£430m buy-in with the Tioxide Pension Fund, securing the benefits of around 2,700 retirees and deferred members

·    c£400m buy-in with the TT Group (1993) Pension Scheme, securing the benefits of circa 5,000 retirees and deferred members

·    c£370 million buy-in with London Heathrow's BAA Pension Scheme, securing the benefits of more than 1,400 retirees

Strong US volumes with significant growth

Capitalising on the growing market opportunity and affirming our competitive position in the US, LGRI delivered $2,096m in 2022, almost double the US PRT business originated in the prior year (2022: £1,763m; 2021: $1,095m; £789m).  As the US market continues to grow and mature, LGRI is strongly positioned to leverage cross-divisional synergies to boost momentum in the region.  

As always, our focus is on shareholder value creation, and we maintain disciplined pricing to ensure strong economic returns.  This has been fundamental to our success to date and positions us well as we begin to undertake larger PRT transactions.  In 2022, we wrote two of our largest ever US PRT transactions, each greater than $500m, with strong economic returns.  In addition, we secured £459m of Canadian deals through our reinsurance entity and continue to develop strategic partnerships in the region, increasing our overall presence in North America.

As the only insurer providing PRT directly to pension plans across the UK and US, Legal & General is also strongly positioned to offer international pension de-risking solutions.

Legal & General Capital

1. Includes short-term liquid holdings.

Total operating profit of £509m increased 10% over 2022

LGC operating profit increased by 10% to £509m (2021: £461m).  This growth principally reflects increased profits from our alternative asset portfolio of £400m (2021: £350m), driven by strong demand in the housebuilding market and continued maturing of the portfolio. 

Profit before tax attributable to equity holders was £101m, driven by investment and other variances of £(408)m, largely due to adverse market performance in traded equities, as well as the more minor revaluation of some land assets and development projects reflecting higher interest rates.

Our growing alternative asset portfolio achieved a net portfolio return of 7.5% (2021: 8.5%).

Alternative asset portfolio grew 21% over 2022 to £4.2bn

LGC continues to strengthen its capabilities across a diversified range of alternative assets that are underpinned by structural growth drivers.  In 2022, our alternative asset portfolio increased to £4,162m (2021: £3,439m) as we deployed a further £0.8bn, and made new undrawn commitments of £0.5bn across our existing investment platforms.  Through these investments, we originate assets that generate strong returns for shareholders, create attractive Matching Adjustment (MA)-eligible assets for our annuity portfolio, and supply attractive alternative assets to third party clients.  An example of this is the new JV between LGIM and our NTR investment, where we participated as one of the cornerstone investors for the Clean Power (Europe) Fund.

Specialist Commercial Real Estate: developing real estate to support global science and technology

Supporting the need to "Level Up" towns and cities across the UK, we continue to invest alongside public and private sector partners, to drive forward some of the largest urban transformation schemes, back digital infrastructure and fund the next generation of science and innovation centres.  Our £4bn partnership with Oxford University made significant progress with construction underway on 3 sites representing a combined Gross Development Value of c£330m, with 5 more sites in the pipeline for future development. 

Through Bruntwood SciTech, the UK's leading innovation, science and technology focused platform, we have continued to develop world-leading diagnostic and life sciences infrastructure.  With a NAV increase of 36% to £321.1m in their year-ending September 2022 and total assets under management of c£860m, Bruntwood SciTech now operates in 11 locations across 7 cities, with a portfolio of c2.4m sq ft.

Another milestone achievement in 2022 was our first investment in the US.  Our 50:50 partnership with US real estate developer and asset manager, Ancora, is building out a real estate business dedicated to driving life science, research and technology growth across the US. Ancora L&G will be capitalised by LGC to deliver $4bn (£3.2bn) of existing pipeline and planned acquisition and development activity over the next five years.  To support and accelerate future growth, the partnership will work with third party co-investment partners, which, in time, will create a new income stream of third party fees.

In 2022, we announced a seven year £4bn partnership with the West Midlands Combined Authority (WMCA) to invest in regeneration, Net Zero neighbourhoods and housing. 

LGC continues to make progress in its digital infrastructure investments.  Kao Data, a wholesale colocation data centre platform, has continued to develop its existing three sites, as well as to explore organic and inorganic expansion opportunities.

LGC is also pursuing data centre development opportunities which, once developed, can create opportunities for our annuity business.

Our investment in WiredScore, an early-stage real estate digital connectivity accreditation business, has continued to grow and successfully completed a fundraise which will be used to fund further expansion.

Clean Energy: expanding our investments in infrastructure and innovation

Supporting the Group's ambitions to address climate change and deliver shareholder returns, we invest in early-stage innovative clean technology companies and low carbon energy infrastructure needed to meet UK and global UN climate targets and Sustainable Development Goals. 

LGC continues to invest in new and innovative sectors including:

·    Sero Technologies ('Sero'), an energy technology and services company supporting the transition to Net Zero across the residential housing sector. 

·    SunRoof, a Swedish start-up revolutionising the capture and use of renewable energy through its solar roof system.

·    Vaarst, a leading provider of subsea 3D computer vision technologies; supporting the offshore wind, wave & tidal, scientific, maritime security, and civil engineering industries.

·    Brill Power, a battery management system provider which improves battery performance for energy storage.

We also announced an additional investment in Kensa Group, a UK manufacturer and installer of ground source heat pumps.  In the 24 months since LGC became shareholders, the manufacturer has doubled the amount of ground source heat pumps produced.  In December, Kensa and Legal & General officially opened the UK's largest production facility dedicated to ground source heat pumps with a plan to rapidly increase output by a further 50%.

We have a substantial pipeline of new investment opportunities including energy storage, electric vehicle technology and renewables, and, after an active 2022, we expect to further expand our growth equity portfolio in 2023.

Housing: developing our multi-tenure UK residential platform

LGC continues to scale up in Housing and had a landmark year, delivering over 5,000 new homes across our portfolio with a focus on creating sustainable homes.  As energy prices increase, our research shows an acceleration in consumer demand for energy efficient homes.  Diversified across affordability and life stage, LGC's Housing investments meet the UK's long-term social and economic need for quality housing for all demographics while producing long-term dependable shareholder returns.  During 2022, our Housing portfolio grew to £2,268m (2021: £1,979m).

LGC's Build to Sell business, Cala, delivered an excellent performance across 2022, achieving the financial targets set out at the FY 2021 results, with pre-tax profit of £169m, up 27% (2021: £132.7m).  Cala delivered revenue of £1.36bn, up 10% (2021: £1.24bn) through the sale of 3,027 units (2021: 2,904 units).  Buyers remain attracted to Cala's outstanding quality of design and construction, whilst the supply shortage of new homes continues to support new home delivery. 

Our Affordable Homes business is well positioned to address a growing market demand and has continued to establish itself as one of the UK's leading institutional developers and managers of affordable housing.  The business delivered £37m of operating profit in 2022 (2021: £26m), increasing the number of operational affordable homes by 1,365 to a total of 3,032 homes.  Its development and operation pipeline now stands at over 6,500 homes, with a Gross Asset Value of £1.2bn.  

Our Build to Rent businesses address another sub-section of the housing market which is expected to see significant and sustained demand.  Our Urban Build to Rent joint venture with PGGM has continued to make strong development progress across the UK's major towns and cities.  We now have a £200m portfolio of c2,500 Urban BTR homes with 7 schemes in operation or development, creating a strong pipeline of attractive, high-quality assets for LGIM clients.

Growth in our Inspired Villages retirement living business continues at pace, driven by the partnership with Natwest Group Pension Fund.  Our Later Living platform has made good planning and development progress, and Inspired Villages is on track to deliver over 5,000 homes over the life of the partnership. 

Our Modular Housing business has delivered houses on multiple sites and continues to work towards profitability as it builds its pipeline.

SME Finance: Actively investing in the real economy and technological innovation

In the Alternative Finance sector, through our GP Stakes Investment programme, we continue to support UK and European mid-market lending through our investment in Pemberton, an asset manager specialising in private debt, in which we hold a 40% stake. The Pemberton platform has raised over €16.5bn (2021: €13.5bn) across five strategies, since we first invested in 2014, with 180 investors globally.  Of this €16.5bn, €12.0bn is fee-earning AUM (2021: €8.7bn) across 90 companies, delivering €99m in revenue (2021: €74m).  Since 2015 Pemberton has grown fee-earning assets by 58% CAGR and revenues by 79% CAGR.   

Our GP Investing platform has also recently announced a new investment in Women-led Impact Asset Manager, ImpactA, with ambitions to act as a cornerstone investor in their first fund, targeting sustainable infrastructure in Emerging Markets.  This will deliver transformational infrastructure projects to support the climate transition and reduce inequalities.

Our Venture Capital Funds platform backs over 600 start-up businesses across the UK and Europe through our fund-of-funds programme and via direct investment.

LGC's Venture Capital Fund-of-Funds programme showed progress in 2022 notwithstanding market volatility, with NAV growing by 17% to £200m.  Demonstrating the value of our patient investment approach, the portfolio has delivered an IRR of over 20% after fees since inception in 2016, with most of the funds we invested in early in the programme now maturing.

Legal & General Investment Management

1.             International asset net flows are shown on the basis of client domicile.

2.             International AUM includes assets from internationally domiciled clients plus assets managed internationally on behalf of UK clients. 

Operating profit of £340m, reflecting higher interest rates and volatile equity markets

Operating profit of £340m (2021: £422m) reflects the impact of higher interest rates and volatile equity markets on assets under management, in addition to higher inflation impacting the cost base.

Assets under management (AUM) decreased by 16% to £1,195.7bn (2021: £1,421.5bn), despite strong external net flows of £49.6bn (2021: £34.6bn), which represented 4% of external opening AUM.  New inflows delivered £22m of annualised net new revenue (ANNR) across higher-margin areas including thematic ETFs and Multi-asset, however this was fully offset by decreasing Defined-Benefit (DB) revenues as higher fee products were sold by clients to meet Liability Driven Investing (LDI) collateral requirements.

Management fee revenue decreased by 4% to £944m (2021: £980m), though transactional revenue was robust at £26m (2021: £32m), driven by execution fees with increased hedging activity and performance fees.

While we will continue to invest into areas of potential growth and on the infrastructure to support the business, against this challenging backdrop we will maintain a disciplined approach to cost management.  We took expense actions over 2022, including on recruitment and variable compensation, to combat the impact of higher expense inflation and market movements on revenue.

Deepening our global institutional pensions footprint with International AUM of £441bn

Our focus on international growth generated strong international net flows of £21.4bn, reflecting our deepening relationships with a number of leading international clients and underpinning our conviction in our ability to grow international AUM and earnings.  

Our US DB de-risking business had a strong year, with net flows of $6.0bn representing the strength of our capabilities and client/consultant relationships in helping pension plans achieve their investment objectives.  Improved funding ratios due to higher interest rates and wider credit spreads have increased demand for fixed income and customised liability hedging strategies.

Our European expansion continued at pace by growing the number of relationships with clients, consultants and intermediaries in our core markets of Germany, Italy and Switzerland.  We added senior distribution headcount into our Frankfurt and Milan offices and prepared for the opening of our Zurich office in March 2023.

LGIM saw £17.2bn of net flows from Japanese clients and we are now Japan's 7^th largest asset manager.[37]  Asia (ex-Japan) saw flows of £11.3bn from multiple clients across the region. 

Overall, 37% of our AUM now comes from international sources, demonstrating our internationalisation strategy is taking effect. Our goal is for half of our AUM to be from international sources by the end of this decade.

Accelerating growth in Global Wholesale

In UK Wholesale, we ranked 2nd for both gross and net fund sales in 2022.  We continued to expand our Model Portfolio Service (MPS), further extending our successful Multi-asset proposition into the maturing advisory market, and with the addition of two new funds completing the build of our Future World ESG Multi-Index range.  We believe our scale and expertise can disrupt this market while helping clients meet their investment objectives.  The launch of our Global Thematic unit trust also makes our thematic strategies available to a wider client base.  Our property fund for retail investors continues to be one of the market leaders with over £1.5bn of AUM and our higher margin Multi-asset funds now collectively have over £10.4bn in AUM from UK retail investors. 

Our ETF business continues to grow strongly following our acquisition of Canvas in March 2018.  Over this period, revenue has more than tripled.  The business has shown resilience in 2022, against a challenging backdrop, with $1.3bn of external net flows delivering an annualised net new revenue of $3.8m. 

LGIM continues to be ranked second on AUM in the European thematic ETF market.  Our diversified range consisting of Equity Thematic, Fixed Income, and Commodities ETFs has supported our strategy of growth into higher-margin areas.  We launched four new thematic ETFs over H2 22 covering emerging cyber security, optical technology and photonics, global multi-theme and the metaverse.  We are expanding our retail footprint through a partnership with Gerd Kommer Invest and plan to launch a co-branded ETF to provide broad diversified multi-factor exposure to global equities.  

Ongoing strength in UK

The Defined Contribution (DC) business continues to attract new assets, with external net flows of £11.6bn, supported by the ongoing growth in Retail's Workplace pension business, which now has 4.9 million members.  Annualised net new revenue was £15m and total UK DC AUM is £135bn (2021: £138bn).  This success is underpinned by LGIM's strong customer focus and innovative product proposition, as shown by a 93% persistency rate among our DC customers. 

L&G also has one of the largest and fastest-growing UK Master Trusts, which now has £19.8bn AUM, reflecting the increasing appeal of the structure for DC plans wishing to outsource their governance, investment and administration.  Growth in our UK Master Trust business continues to support growth in Multi-asset flows, since this is the default option for many of our clients.  Our ability to offer investors an integrated blend of high-quality investment solutions, pensions administration and Master Trust governance for a value bundled price maintains a significant source of competitive advantage for LGIM's DC business.

LGIM supports UKDB clients with a variety of solutions to meet their needs, including LDI, which aims to lower the volatility of DB pension schemes' funding levels.  In the second half of 2022, the gilt market experienced unprecedented volatility, precipitated by the mini-Budget in September, amid a global context of rising interest rates.  As gilt yields spiked, schemes using LDI were required to post higher levels of collateral.  Throughout this period, which ultimately prompted an intervention from the Bank of England, we remained focused on managing risk to achieve our clients' long-term objectives.  Over the course of 2022, we experienced positive flows into LDI.  However, and as noted, overall DB revenue decreased as interest rate rises caused assets under management to reduce and as clients sold higher fee-generating products to meet collateral requests.  We remain fully committed to our full range of Solutions products.

Breadth of investment management solutions

1.     Please see disclosure 4.01 for further details.

2.     PRT transfers reflect outflows in respect of LGIM clients who have moved to PRT with LGRI

We continue to see positive flows in Solutions - £59.3bn (2021: £19.9bn) - driven by strong demand in the UK following the sharp rise in gilts, leading to our clients increasing collateralisation levels on LDI products.  We have also seen growth in the US and APAC as DB clients continue to de-risk.  We manufacture Solutions in both publicly and privately traded asset classes and combine these in integrated portfolios for our DB clients.  We are well positioned to capitalise on this continuing trend.  Together with our Fiduciary business offering, and working closely with LGRI's PRT business, we can support DB schemes at all stages of their funding journey.  In 2022 we signed an agreement with the British Steel Pension Scheme to manage the £9.9bn[38] assets in its DB scheme.  This approach is competitively differentiated in the market and provides a template for similar future deals.

Multi-asset strategies continue to be in demand from DC schemes and Wholesale customers.  External net flows into Multi-asset funds were £4.2bn (2021: £7.0bn), and we have seen positive initial market sentiment following the launch of our Future World Multi-Index range.

Index reported external net outflows of £6.8bn (2021: £4.9bn) with new international flows into Japan (£17.3bn), Asia (£7.5bn), and continued positive ETF flows momentum more than offset by Index outflows in the UK and US, reflecting the structural trend of DB schemes de-risking as well as the need to fund increased collateralisation levels in LDI.

Active Strategies reported external net outflows of £7.5bn (2021: £2.9bn) reflecting positive net inflows from US clients, more than offset by net outflows from UK DB clients as assets were sold down to fund LDI collateral calls.

Real Assets saw total net flows of £3.4bn (2021: £1.9bn) driven by additional Private Credit transactions to support LGRI's PRT proposition.  We expect future growth in flows to be supported by our Build to Rent business and by Private Credit, which offers clients diversification of secure income and value protection solutions, and which UK DB investors are now accessing through our successful SIAF and STAFF private credit funds.[39]  We are continuing to build on our partnership with NTR, a leading renewable energy specialist, to provide institutional investors in the UK, Europe and Asia access to the €1 trillion European energy transition.  In 2022 we launched our L&G Clean Power (Europe) fund with initial capital raising of over €200m. 

Investment performance

The market backdrop in 2022 has been very challenging.  War in Ukraine has led to widespread disruption in energy supplies and contributed to spiralling inflation.  This, in turn, has led to considerable volatility and weakness in both fixed income and equity markets with key benchmark indices posting double-digit negative total returns, leaving very little respite for investors.  As a result, short-term performance across some of our Multi-asset strategies has been challenging, especially those seeking a "cash plus" outcome.

The relative performance of our UK-managed Active Fixed Income strategies was strong with 82% of strategies out-performing over 3 years and 83%^[40] over 5 years.  Our US-managed Active Fixed Income strategies have also performed well with 91% of strategies out-performing over 3 years and 95% over 5 years.  Within Private Markets, 67%^[41] of our Real Estate Equity funds have outperformed over 3 years and our Private Credit performance remains strong.

In Solutions and Index our investment success is driven by asset liability matching, for example liability driven strategies, or by tracking indices predefined by our clients.  We continue to deliver against these target returns consistently and successfully, as evidenced by increasing client flows.

Our investment success is also evident in the number of independent awards we have won over 2022 for investment performance, including the ESG award at the City AM Awards 2022, Investment Manager of the Year and Passive Manager of the Year at the European Pensions Awards 2022, and Residential Asset Manager of the Year at the Property Week Resi awards.

Leading in responsible investing

LGIM continues to build on its credentials as a responsible investor and remains committed to leading the asset management industry in addressing the environmental and social challenges arising from a rapidly changing world. 

As at 31st December 2022, LGIM managed £332.2bn (2021: £290.0bn) in responsible investment strategies explicitly linked to ESG criteria for a broad range of clients.[42]

LGIM has a unified purpose: to create a better future through responsible investing.  To that end, and partnering with our clients, we work to raise market standards and best practice on vital global issues, leveraging our position as one of the largest global asset managers.  LGIM is, for example, a founding signatory of the Net Zero Asset Managers Initiative, and has a global marketing partnership with Lewis Pugh, the UN Patron of the Oceans.

·    Client Focus and Product innovation: Clients globally recognise and value LGIM's authenticity in aligning Responsible Investment to the Group's Inclusive Capitalism ethos. Over the past 12 months the proportion of LGIM's assets under management in responsible investment strategies has risen from 20% to more than 27%.  This reflects our partnerships with clients to refine their existing strategies and launch new strategies aligned to their responsible investment objectives.  As an increasing number of clients allocate assets to strategies either embedding or specifically targeting environmental and/or social factors, we have also invested in data and technology to provide them with clarity on the ESG characteristics of their investments.  Around 95% of all new products developed and mandates launched at LGIM in 2022 have been ESG-related.  Recent examples of ESG product innovation that place us at the forefront of growing client demand include:

·    Launch of the Clean Power Energy Fund

·    The launch of a Global Diversified Credit fund aligned to the UN's Sustainable Development Goals.

·    The launch of Net Zero, Paris Aligned and climate transition funds helping clients meet their own climate commitments

·    The evolution of many of our SICAV fund range to include explicit decarbonisation objectives

·    The Sustainable DC Property Fund

·    Stewardship with impact: At LGIM, we are committed to using our scale and influence to raise market standards and best practice across climate, nature, people and technology.  As responsible investors, we aim to vote every share that we hold, in line with our stewardship engagement and policies, and publish our voting activities on our dedicated website.[43]  We rate around 17,000 companies through our proprietary scoring system, the LGIM ESG Score, and we capture roughly 5,000 companies within our flagship corporate engagement programme, the Climate Impact Pledge.  In addition to our own engagements, we are active collaborators with our peers through global organisations such as the CA100+ and the IPDD (Investors Policy Dialogue on Deforestation).

·    Investment in Tumelo: In early 2022 we acquired a minority stake in Tumelo, an ESG digital engagement platform, which enables pension scheme members to express their preference on AGM proposals of companies they are invested in.  By providing this capability to our DC pension clients we are driving greater consumer engagement and enabling LGIM to better understand members' views and use these as an input to LGIM's engagement themes and voting stance.

Retail Division

1.             UK Insurance includes Retail Protection, Group Protection, Fintech and Mortgage Services.

2.             Includes the annual dividend of $114m (2021: $111m) paid by LGIA to the Group in March 2022.

3.             This represents the Workplace Savings administration business. Profits on the fund management services we provide are included in LGIM's asset management operating profit.

4.             In the UK, annuity assets across LGRI and Retail are managed together. Estimated proportion of annuity assets belonging to Retail retirement

Strong operating profit result of £825m, up 33%

US Insurance saw a return to profit in 2022, despite another year of industry-wide adverse mortality in the US, driven by robust new business volumes and the benefit from reinsuring the in-force universal life business.  After significant Covid mortality experience over Q1 22, the market continued to see elevated levels of mortality over the year, leading to claims exceeding the provision raised at FY 2021.  A new prudent provision of $40m (£32m) has been included in the results to allow for the uncertainty of Covid and flu over the remainder of winter.

Retail retirement growth is driven by the growing release from operations in the retail annuity portfolio, in addition to routine assumption changes.  Prudently updating the base mortality rate assumption annually in line with experience is the biggest element, given we retain the majority of longevity exposure on our retail annuity portfolio.

UK Insurance has benefitted from the ongoing release from operations in the UK protection businesses, in addition to valuation uplifts in our Fintech investments in Salary Finance and Smartr365 following successful funding rounds over 2022.  The 2021 UK Protection result included a one-off benefit of £107m from the introduction of an illiquidity premium in the UK Protection liability discount rate.

Profit before tax was predominantly impacted by the formulaic change in discount rates, as experienced in previous periods.  The positive investment variance of £817m was driven primarily by an increase in UK and US government bond yields which have resulted in a higher discount rate used to calculate the Insurance reserves.  The UK liability discount rate increased by 283bps and US 10-year Treasury yields increased by 237bps.

Solvency II New Business Value decreased to £226m (2021: £323m) reflecting the impact of higher interest rates and lower volumes in Retail protection after a strong 2021.  The Insurance business continues to generate Solvency II surplus immediately when written and provides diversification benefits to the Group. 

Robust trading performance over 2022

UK Retail protection gross premium income increased to £1,485m (2021: £1,444m), with new business annual premiums of £171m (2021: £200m) in a smaller market³⁶ (2021 benefitted from a buoyant housing market).  L&G continues to lead the UK protection market with a market share of 23%[44], delivering a point-of-sale decision for more than 81% of our customers.  

UK Group protection new business annual premiums were £107m (2021: £88m) with gross written premiums increasing 5% to £427m (2021: £405m).  Our online "quote and apply" platform for smaller schemes continues to perform well, processing 600 new clients over the year (2021: 80) and we are seeing strong growth in this part of the market.  Group Protection supported 3,223 members of income protection schemes to return to work during 2022.

US protection (LGIA) gross written premiums increased 4% (up 16% on a sterling basis, benefiting from FX movements) to $1,512m (2021: $1,449m), with new business annual premiums up 4% to $129m (2021: $124m).  LGIA ranked number one in the brokerage general agency channel in the third quarter by new policies issued and number two in new premium.  We continue to develop our market-leading, digital new business platform which now covers 80% of new business.   

Legal & General Mortgage Club facilitated a record £110bn of mortgages, up 12% (2021: £98bn), driven by strong demand over the year, most notably in the re-mortgage market.  We remain the largest participant in the UK intermediated mortgage market and are involved in around one in five of all UK mortgage transactions.  Our Surveying Services business facilitated over 512,000 surveys and valuations (2021: 528,000). 

Individual annuity sales were £954m (2021: £957m) in what has been a challenging market during 2022, with the volatile macro-economic environment impacting the timing of retirement.  Our performance has remained strong: our operational service, competitive pricing and intermediary presence allowed us to maintain a market share of 20.3% over 2022.³⁶  Following the increase in interest rates over the second half of the year, we saw demand for individual annuities (particularly fixed term annuities) increase towards the end of the year.  We expect this to continue into 2023.

Lifetime mortgage advances, including Retirement Interest Only mortgages, were £632m (2021: £848m). Throughout this period of rising interest rates, we have maintained pricing and underwriting discipline. 

Workplace Savings net flows were £7.3bn (2021: £8.5bn), driven by continued client wins and increased contributions.  Members on the Workplace pension platform increased to 4.9 million at the end of 2022.  We are continuing to focus on improving efficiency and member experience as the business grows.

Scaling up our Fintech businesses

Retail has continued with its strategy to invest in and scale up innovative fintech businesses in adjacent markets. 

Salary Finance, an employee benefits platform in which we have a 48% holding as at year end 2022, continues to grow rapidly, with the platform now connected to over 4.6 million employees across the UK and US.  Gross revenue grew to £43.6m, an increase of just over 45% year on year.  In order to position itself for continued growth, Salary Finance received a substantial injection of cash by successfully completing a funding round, in addition to executing a transaction to sell Work Report to Experian.  

Our 49% holding in Smartr365 - a complete end-to-end mortgage platform designed to simplify the mortgage process for brokers, introducers, networks and consumers - has continued to build scale, and also achieved a successful funding round in 2022.  We now have around 3,300 users on the platform and continue to receive strong feedback on the proposition.   

Three new investments were made this year: Onto, an all-inclusive electric car subscription provider; Moneyhub, an open finance and payments platform; and Generation Home, a mortgage provider.  Onto's growth plans include opportunities for a salary deduction workplace offering which L&G is ideally placed to support given our multiple, workplace-focused businesses and investments.  Onto's business model also aligns well with our ambitions to help the UK economy transition to net zero.  Moneyhub is an open finance platform which provides a single connection to thousands of financial institutions across 37 countries enabling open banking and data solutions.  Their vision, which is to enhance the lifetime financial wellness of their customers, is closely aligned to that of our Workplace Savings business.  Generation Home adds another important investment to our substantial presence in the mortgage and home-finance "ecosystem", with opportunities to increase loans for first-time buyers by allowing multiple buyers and income boosters.

Subsidiary dividends to Group

1. Represents cash that will be remitted from subsidiaries to Group in respect of the year's financial performance.

2.  Other includes Legal & General Home Financing, Legal & General Capital Investments Limited, Legal & General Reinsurance, and Legal & General Partnership Services Limited.

The level of subsidiary dividends ensures coverage of external dividends (2022: £1,153m; 2021: £1,101m) and Group related costs, with excess liquidity being held within our regulated subsidiaries. 

Borrowings

The Group's outstanding core borrowings totalled £4.3bn at 31 December 2022 (FY 2021: £4.3bn).  There is also a further £1.2bn (FY 2021: £0.9bn) of operational borrowings including £0.9bn (FY 2021: £0.9bn) of non-recourse borrowings. 

Group debt costs of £214m (2021: £230m) reflect an average cost of debt of 4.8% per annum (2021: 5.0% per annum) on an average nominal value of debt balances of £4.5bn (2021: £4.6bn).

Taxation

The 2022 effective tax rate reflects the different rates of taxation that apply to Legal & General's overseas operations, as well as applying the future enacted UK tax rate of 25% (which applies from 1 April 2023) on deferred tax movements in the period.

The tax rate on operating profits, excluding the impact of investment variance, was 16.0% (2021: 15.5%).

Solvency II

As at 31 December 2022, the Group had an estimated Solvency II surplus of £9.9bn over its Solvency Capital Requirement, corresponding to a Solvency II coverage ratio of 236%. 

1.     Please see disclosure note 5.01(d) for further detail.

Operational surplus generation increased to £1,805m (2021: £1,636m), after allowing for amortisation of the opening Transitional Measures on Technical Provisions (TMTP) and release of Risk Margin. 

New business strain was £(352)m, primarily reflecting UK PRT volumes written at a capital strain of less than 4%.  This resulted in net surplus generation of £1,453m (2021: £1,282m), which was in excess of the £1,116m of dividends paid during the year. Note: our ambition is for net surplus generation to exceed dividends cumulatively over the period 2020-2024.  From the start of the ambition period to FY 2022 we have generated £0.7bn of cumulative net surplus over the dividend.  

Operating variances include the impact of experience variances, changes to assumptions, and management actions.  Market movements of £1,720m primarily reflect the impact of rising rates on the valuation of our balance sheet, partially offset by weaker asset markets, predominantly in equities, credit spread dispersion in sub-investment grade assets, as well as a number of other, smaller variances.

The movements shown above incorporate the impact of recalculating the TMTP as at 31 December 2022.

Reconciliation of IFRS net release from operations to Solvency II net surplus generation¹

The table below gives a reconciliation of the Group's IFRS Release from operations and Solvency II Operational surplus generation in 2022:

The table below gives a reconciliation of the Group's IFRS New business surplus to Solvency II New business strain in 2022:

1. Please see disclosure 1.02 and 5.01 (f) for further details.

Sensitivity analysis²

2. Please see disclosure 5.01 (h) for further details.

The above sensitivity analysis does not reflect all management actions which could be taken to reduce the impacts. In practice, the group actively manages its asset and liability positions to respond to market movements. Other than in the interest rate and inflation stresses, we have not allowed for the recalculation of TMTP. Allowance is made for the recalculation of the Loss Absorbing Capacity of Deferred Tax for all stresses, assuming full capacity remains available post stress.

The impacts of these stresses are not linear therefore these results should not be used to interpolate or extrapolate the impact of a smaller or larger stress. The results of these tests are indicative of the market conditions prevailing at the balance sheet date. The results would be different if performed at an alternative reporting date.

Solvency II new business contribution

Management estimates of the present value of new business (PVNBP) and the margin as at 31 December 2022 are shown below¹:

The key economic assumptions as at 31 December 2022 are as follows:

1. Please see disclosure 5.02(b) for further details.

The future earnings are discounted using duration-based discount rates, which is the sum of a duration-based risk free rate and a flat margin for risk. The risk free rates have been based on a swap curve net of the PRA-specified Credit Risk Adjustment. The risk free rate shown above is a weighted average based on the projected cash flows.

Other than updating for recent experience, all other economic and non-economic assumptions and methodologies that would have a material impact on the margin for these contracts are unchanged from those previously used by the group for its European Embedded Value reporting, other than the cost of currency hedging which has been updated to reflect current market conditions and hedging activity in light of Solvency II.

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 and are rewarded for, and which are consistent with delivery of our strategic objectives. Risk management is embedded within the business.  The Group's Principal Risks and Uncertainties summarise key matters that may impact the delivery of Group's strategy earnings or profitability. 

RISKS AND UNCERTAINTIES                                                               TREND, OUTLOOK AND MITIGATION

RISKS AND UNCERTAINTIES                                                               TREND, OUTLOOK AND MITIGATION

RISKS AND UNCERTAINTIES                                                                TREND, OUTLOOK AND MITIGATION

Notes

A copy of this announcement can be found in "Results, Reports and Presentations", under the "Investors" section of our shareholder website at www.legalandgeneralgroup.com/investors/results-reports-and-presentations. 

A presentation to analysts and investors will take place at 10:30am UK time today at One Coleman Street, London, EC2R 5AA.  There will also be a live webcast of the presentation that can be accessed at www.legalandgeneralgroup.com/investors/results-reports-and-presentations. 

A replay of the presentation will be made available on this website by 10^th March 2023.

Definitions

Definitions are included in the Glossary on pages 90 to 92 of this release

Forward-looking statements

This announcement may contain 'forward-looking statements' with respect to the financial condition, performance and position, strategy, results of operations and businesses of the Company and the Group that are based on current expectations or beliefs, as well as assumptions about future events.  These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts.  Forward-looking statements often use words such as 'may', 'could', 'will', 'expect', 'intend', 'estimate', 'anticipate', 'believe', 'plan', 'seek', 'continue' or other words of similar meaning.  By their very nature, forward-looking statements are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and the Group's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements.  Recipients should not place undue reliance on, and are cautioned about relying on, any forward-looking statements. 

There are several factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements.  The factors that could cause actual results to differ materially from those described in the forward-looking statements include (but are not limited to): changes in global, political, economic, business, competitive and market forces or conditions; future exchange and interest rates; changes in environmental, social or physical risks; legislative, regulatory and policy developments; risks arising out of health crises and pandemics; changes in tax rates, future business combinations or dispositions;  and other factors specific to the Group.  Please see the Group's latest Annual Report and Accounts for further details of risks, uncertainties and other factors relevant to the business (available from 16^th March 2023: https://group.legalandgeneral.com/en/investors/results-reports-and-presentations).  Any forward-looking statement contained in this document is based on past or current trends and/or activities of the Group and should not be taken as a representation that such trends or activities will continue in the future.  No statement in this document is intended to be a profit forecast or to imply that the earnings of the Group for the current year or future years will necessarily match or exceed the historical or published earnings of the Group.  Each forward-looking statement speaks only as of the date of the particular statement.  Except as required by any applicable laws or regulations, the Group expressly disclaims any obligation to revise or update any forward-looking statement contained within this document, regardless of whether those statements are affected as a result of new information, future events or otherwise.  

Caution about climate information

This announcement contains climate and ESG disclosures which use a large number of judgments, assumptions and estimates.  These judgments, assumptions and estimates are likely to change over time, in particular given the uncertainty around the evolution and impact of climate change.  In addition, the Group's climate risk analysis and net zero strategy remain under development and the data underlying the analysis and strategy remain subject to evolution.  As a result, certain climate and ESG disclosures made in this announcement are likely to be amended, updated, recalculated or restated in future announcements.  This statement should be read together with the Cautionary statement contained in the Group's latest Climate Report.

The information, statements and opinions contained in this announcement do not constitute an offer to sell or buy or the solicitation of an offer to sell or buy any securities or financial instruments nor do they constitute any advice or recommendation with respect to such securities or other financial instruments or any other matter.

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 Annual Report & Accounts.  The financial position of the group, its cash flows, liquidity position and borrowing facilities are described in the Group Results. Principal risks and uncertainties are detailed on pages 26 to 29.

The directors have made an assessment of the group's going concern status, considering both the group's current performance and the group's outlook, using the information available up to the date of issue of this Annual Report & Accounts.

The group manages and monitors its capital and liquidity, and applies various stresses, including high inflationary scenarios, to those positions to understand potential impacts from market downturns.  Our key sensitivities and the impacts on our capital position from a range of stresses is disclosed in section 5.01(h) of the Capital section of the Full year report 2022.  These stresses do not give rise to any material uncertainties over the ability of the group to continue as a going concern.  Based upon the available information, the directors consider that the group has the plans and resources to manage its business risks successfully and that it remains financially strong and well diversified.

Having reassessed the principal risks and uncertainties (both financial and operational) in light of the current economic environment, as detailed on pages 26 to 29, the directors are confident that the group and company will have sufficient funds to continue to meet their liabilities as they fall due for a period of, but not limited to, 12 months from the date of approval of the financial statements and therefore have considered it appropriate to adopt the going concern basis of accounting when preparing the financial statements.

Directors' responsibility statement

We confirm to the best of our knowledge that:

i.      The Group financial statements within the full Annual Report and Accounts, from which the financial information within this preliminary announcement has been extracted, and which have been prepared in accordance with UK-adopted IFRSs, give a true and fair view of the assets, liabilities, financial position and profit of the Group;

ii.     The preliminary announcement includes a fair review of the development, performance and position of the Group, as well as the principal risks and uncertainties faced by the Group; and

iii.    The directors of Legal & General Group Plc are listed in the Legal & General Group Plc website: www.legalandgeneralgroup.com/about-us/our-management/group-board/.

By order of the Board

Sir Nigel Wilson                                                                                   Stuart Jeffrey Davies

Group Chief Executive                                                                       Group Chief Financial Officer

7 March 2023                                                                                      7 March 2023

Enquiries

Investors

+44 203 124 2091

Edward Houghton, Group Strategy & Investor Relations Director

Investor.relations@group.landg.com

+44 203 124 2054

Nim Ilankovan, Investor Relations Director

Investor.relations@group.landg.com

+1 240 397 0053

Blake Carr, Investor Relations Director

Investor.relations@group.landg.com

Media

+44 203 124 2090

John Godfrey, Group Corporate Affairs Director

+44 207 353 4200

Graeme Wilson, Teneo

+44 207 353 4200

Misha Bayliss, Teneo