L&G FY 2012 Preliminary Results - Part 1

Stock Exchange Release

06 March 2013

earnings per share up 12% and dividends up 20%

financial highlights: 

·          Earnings per share UP 12% to 13.90p (2011: 12.42p)

·          FULL YEAR DIVIDEND UP 20% TO 7.65P PER SHARE (2011: 6.40P PER SHARE)

·          OPERATING PROFIT up to £1,087M (2011: £1,053M); operating profit from divisions up to £1,115m (2011: £1,058m)

·          Profit after tax up to £801m (2011: £721m)

·          Net cash up to £865m (2011: £846m); net cash from divisions up to £845m (2011: £802m)

·          IFRS return on equity 15.5% (2011: 14.9%)

accelerating growth in flows and stock: 

·          LGIm net flows UP TO £7.1bn (2011: £3.0bn)                   AUM UP 9% TO £406bn

·          individual annuity sales up 26% to £132m                   Aum up 13% to £32bn

·          savings sales up 15% to £1.5bn                                       auA up 8% to £70bn

·          uk protection sales up 25% to £221m                          gwp up 6% to £1.3bn

·          US protection sales up 28% to $142m                          gwp up 10% to $922m

·          Gi premiums up 15% to £349m

Nigel Wilson, Group Chief Executive, said:

"Legal & General's double-digit sales growth in 2012 broke records, again demonstrating that customers value our insurance, savings and investment propositions. An uncertain, sluggish economy has had minimal impact. The more important growth drivers for us are ageing populations, falling state spending on welfare and new long-term investment opportunities as banks retrench. Our expertise, scale and synergies enable us to provide solutions to these challenges, placing us squarely among the beneficiaries from these structural changes.

 

Our 20% increase in dividend is underpinned by 12% EPS growth and strong cash flow. These in turn reflect growing strengths in execution, operational scale and efficient manufacturing and distribution. We have the capability, the opportunity and focused ambition, to grow earnings further in 2013 and beyond. Legal & General will develop the opportunities long-term structural changes offer through focus on retirement solutions, international investment management, digital solutions, protection and direct investment. Our financial strength enables us to continue to deliver strong organic growth, complemented by bolt-on acquisitions, where they can meet our rigorous financial and strategic criteria.

We provide financial services to our customers at the most exciting, critical or difficult moments in their lives, and we help drive investment and growth for the wider economy. Social purpose and financial success are two sides of the same coin here at Legal & General."

Financials	2012	2011	Growth
Pence			(%)
IFRS earnings per share (basic)	13.9	12.42	12
Full year dividend per share	7.65	6.40	20
Return on equity (%)	15.5	14.9	0.6 pps

 

FINANCIAL SUMMARY

OPERATIng profit up in all divisions

 

Financial highlights	2012	2011	Growth
£m			(%)
Analysis of operating profit1
Protection and Annuities	640	601	6
Investment Management	243	234	4
Savings	133	126	6
US Protection	99	97	2
Operating profit from divisions	1,115	1,058	5
Group capital and financing and investment projects	(28)	(5)	n/a
Operating profit	1,087	1,053	3
Investment and other variances	(51)	(100)	49
Profit before tax	1,036	953	9
Net cash generation1
Operational cash generation from divisions	938	896	5
New business strain	(93)	(94)	1
Net cash generation from divisions	845	802	5
Operational cash generation from Group capital and financing	20	44	(55)
Net cash generation	865	846	2

 

RECORD SALES - UK PROTECTION UP 25%; INDIVIDUAL ANNUITIES UP 26%

 

Sales	2012	2011	Growth (%)
£m
UK Protection	221	177	25
Individual annuities	132	105	26
Bulk purchase annuities	102	146	(30)
Savings	1,456	1,262	15
US Protection	90	69	30
Other International	112	78	44
Total APE sales	2,113	1,837	15
Net flows	2012	2011	Growth (%)
£bn
LGIM	7.1	3.0	137
Savings	(0.6)	1.2	(150)

 

scale - LGIM assets: £406bn; annuity assets: £32bn

 

Assets	2012	2011	Growth (%)
£bn
LGIM2	406	371	9
Savings	70	65	8
Annuities	32	28	13
Gross premiums	2012	2011	Growth (%)
UK Protection (£m)	1,268	1,200	6
General Insurance (£m)	349	304	15
US Protection ($m)	922	836	10

 

1.     Operating profit and net cash generation are defined below in the preliminary results announcements.

2.     LGIM assets include £32bn of assets managed on behalf of Annuities and £49bn managed on behalf of Savings.

 

full year dividend increased by 20% to 7.65 pence per share

Double digit growth in earnings per share and a robust capital position coupled with the high level of visibility of future cash flows has led the Board to recommend an increase of 20% in the final dividend to 5.69p (2011: 4.74p) bringing the full year dividend to 7.65p. (2011: 6.40p). The cost of the full year dividend is £452m (2011: £375m) and is covered 1.91 times by the net cash generation.

FINANCIAL HIGHLIGHTS - earnings up 12% driven by growth in scale

In 2012, Legal & General delivered growth in net cash generation, operating profit and earnings per share. This was supported by record sales of £2.1bn (2011: £1.8bn), net inflows into LGIM of £7.1bn (over double 2011), and growth in scale of assets and gross premiums to new highs.

Operating profit increased to £1,087m (2011: £1,053m). All divisions increased operating profit, with total profit from the divisions up 5% to £1,115m (2011: 1,058m). This strong growth has enabled us to deliver earnings per share up 12% to 13.90 pence (2011: 12.42 pence).

The growth in profit is supported by our substantial operational cash generation, which increased to £958m (2011: £940m). Again, all divisions increased operational cash generation, with the contribution from the divisions up 5% to £938m (2011: £896m). This has been delivered through growth in scale of each of our businesses. All divisions reached new heights in scale with LGIM AUM of £406bn, UK Housing and Protection gross premiums of £1.6bn, Savings AUA of £70bn and US Protection gross premiums of $0.9bn.

At the beginning of 2012, we provided operational cash generation guidance of £695m for our Annuities, UK Protection, Insured Savings and With-profits businesses and International dividends. We delivered on our cash guidance with a result of £697m for 2012 which demonstrates the strong predictability of our cash generation.

The operational cash generation from Group capital and financing reduced to £20m (2011: £44m) largely reflecting a reduced return assumption on UK equities of 5.8% (2011: 7.5%).

Growth in protection sales and significant inflows of workplace pensions were delivered efficiently through digital underwriting processes and automated loading of schemes and employees onto the Workplace pension platform. Overall we were able to fund higher levels of sales with marginally lower new business strain at £93m (2011: £94m).

In 2012, £754m (2011: £701m) of the net cash generation from the divisions was distributed to the Group, representing 89% (2011: 87%) of their net cash generation. Shareholder assets now total £6.5bn (2011: £5.9bn).

Legal & General has an IGD surplus of £4.1bn with a coverage ratio of 234%, after allowing for accrual of the final dividend (2011: £3.8bn; 220% coverage). The growth in surplus reflects the strong cash generation of the Group and the benefits of the US capital efficiency programme, which delivered an IGD benefit of £260m in 2012.

In addition to the Group's capital surplus, LGPL (the Group's main annuity subsidiary) has a credit default provision of £1.7bn (2011: £1.6bn). The provision has increased due to the growth in the annuity business during 2012 and is equivalent to 60bps (2011: 61bps) per annum over the life of the portfolio.

 

EXECUTIONAL EXCELLENCE POWERS GROWTH IN 2012

Retail Protection delivered sales 15% higher than in 2011 at £151m (2011: £131m). Automated underwriting provides flexible capacity and enabled 78% of cases to get a decision at the point of sale.

Group Protection sales grew substantially by 52% to £70m (2011: £46m) as Legal & General utilised the opportunities presented by auto enrolment and the continuing trend of businesses and the public sector to insure their employee liabilities.

Individual annuities achieved significant sales growth of 26% to £132m APE (2011: £105m), attracting growing numbers of retirees with higher average fund levels.

Our capability in meeting demand from pension trustees delivered Bulk Annuity sales of £102m (2011: £146m) including the sizeable £35m APE Tate & Lyle buy-in deal, and since the year end we have completed a longevity insurance deal with the BAE Systems 2000 Pension Plan covering £3.2bn of associated liabilities.

Direct investment within the annuity fund doubled to £1.2bn (2011: £0.6bn) in projects including the student accommodation for a number of universities and commercial property loans.

International clients provided net flows to LGIM of £7.8bn with overall net flows into LGIM of £7.1bn, more than double 2011 (£3.0bn).  LGIM America AUM reached $33bn (2011: $24bn) with 39 external clients (2011: 16 clients).

Net inflows to active fixed income mandates were up 25% to £2.0bn (2011: £1.6bn) with total AUM at £82bn (2011: £72bn).

We delivered our RDR platform proposition in November, well ahead of the year end deadline. Legal & General, through sole supplier partnerships with leading building societies, has access to approximately 20m customers, across 1,200 high street branches.

Our Investor Portfolio Services (IPS) platform gained net inflows of £1.2bn and grew AUA to £8.6bn (2011: £6.8bn).

The Workplace platform gained £1.6bn of net inflows and grew AUA to £6.0bn (2011: £3.8bn) as schemes previously won began to be transferred to the platform at the start of auto enrolment in 2012 Q4.

US Protection delivered record sales up 28% at $142m APE (2011: $111m) making them a top 5 provider of term assurance in the US, from a position outside the top 10 just three years ago. This has led to an increase in gross premiums of 10% to $922m (2011: $836m) and operating profit of $156m (2011: $155m).

 

strategy - accelerating evolution

 

Long term structural trends are creating opportunities which fit Legal & General's capabilities and operating model. The long term trend of population ageing is occurring alongside limited capacity for government welfare budgets and pension funding. This requires a shift to greater self reliance supported by insurance and savings solutions and new approaches to pension de-risking.  Banks have reduced lending, however, insurers like Legal & General, with strong balance sheets and long dated liabilities are well placed to provide funding for economic development.

 

As these themes gather momentum, we believe they will enable Legal & General's growth to continue to outperform the broader economy. Strong flows in 2012 reflect this increasing momentum and our ability to respond to demand.

 

We have a strong platform from which to drive the further acceleration of our growth. We retain our focus on operating efficient, high scale businesses with strong financial discipline. We have continued to emphasise strong cash delivery and avoided problem lines. We have created a resilient balance sheet and this strength provides options for growing the business, alongside growing dividends for shareholders and increasing value for society.

 

Accelerating Growth

 

We will evolve our business by combining our strength in organic growth with selected bolt-on acquisitions, which satisfy rigorous financial targets and strategic criteria. We will prioritise development, around the following five themes:

 

1) LGIM International Expansion - There are approximately $15 trillion of pension assets in the US. Legal & General's International business continues to attract increased flows from this source with $33bn of AUM. Flows also continue to build from other regions, and International assets have grown rapidly to £43bn AUM. We will accelerate inflows further, by leveraging existing relationships and extending our distribution capability to ensure profitable growth from scalable, efficient operating models.

 

2) Retirement Solutions - Pension deficits are at unsustainable levels: £75bn for the UK FTSE 350 and $0.5 trillion for the US S&P 1500. Through LGIM, Annuities and Savings we offer comprehensive solutions for different pension funding and retirement income needs. Our group-wide capability enables defined benefit (DB) clients to transition towards full de-risking via active fixed income, Liability Driven Investments (LDI), longevity insurance or partial buy-in. To capture the expected growth in defined contribution (DC) assets to c£830bn by 2022, we have established a leading position in Workplace Savings and enhanced LGIM's DC fund propositions.  We see opportunities to export our annuities capability to Europe and beyond.

3) Digital Solutions - We continuously improve our processes in Protection, Annuities, Savings, and LGIM. Our digital platforms provide economic models for distribution in the workplace and post-RDR landscape and are well placed to gain from the expected doubling of UK assets on savings platforms from £214bn in 2012 to £429bn by 2017. We also intend to increase use of digital tools to engage and acquire customers. Some examples, for 2013 delivery, include a new Group Protection Quote and Buy tool for mid tier employers and an online modelling tool from LGIM to help smaller DB pension clients.

4) Protection - The UK Group Protection market grew 28% in 2012, and we attracted new to market schemes through product innovation and engagement with employers in tandem with pensions auto enrolment. As the UK government reduces welfare spending, protection in the UK can fill the gap. We can also leverage excellence in UK protection to grow our European protection franchises. L&G America is now a major player in the US life insurance market and has a sound platform from which to add new term life products and expand its distribution reach.

5) Direct Investments - Bank balance sheets have shrunk globally, with UK banks' annual net lending declining from around £175bn in 2007 to nil in 2012, creating a need for increased supply of direct finance. We will accelerate our direct investments in business ventures, property and infrastructure to gain higher risk adjusted returns to fund our long term liabilities. We doubled our direct investment from the annuity portfolio in 2012 to £1.2bn.

These themes build on our strengths in asset management and insurance solutions and will drive the acceleration of our scale and earnings growth across our businesses.

 

2013 Outlook

 

As 2013 gets underway, we see momentum building in the long term themes of ageing populations, constraints on welfare spending, pension funding and bank financing. Visibility of welfare reform in the UK from April 2013 will motivate individuals to increase their self-reliance. Our early experience with auto enrolment indicates soft compulsion can encourage saving, with less than 10% of savers so far opted out. Recent deals with Tate & Lyle and BAE Systems provide case studies of our ability to meet demand for innovative pension de-risking options.

LGIM - At the start of 2013 we continue to build on the momentum which saw net flows more than double from £3.0bn in 2011 to £7.1bn in 2012.  In addition to strong demand from US pension schemes, we are attracting growing interest in index funds from the Gulf and Europe, where we have extended our distribution capability.

Individual Annuities - Volumes remain strong in Q1 2013 for individual annuities. We support the move to increase the use of open market options, as we believe it benefits customers. In excess of 75% of our flows are already from external sources.

Bulk Annuities - In February 2013, we transacted a longevity insurance arrangement for the BAE Systems 2000 Pension Plan covering £3.2bn of associated liabilities, which was 70% reinsured to Hannover Re. The flexibility of options we can offer, including partial buy-in and longevity, enable us to offer a wide variety of affordable transition routes to pension trustees looking to de-risk.

Retail Protection - We expect volumes in H1 2013 to be somewhat lower due to gender neutral pricing which was implemented at the end of 2012. However, we expect stable volumes in H2 2013, supported by increased interest from IFAs and higher volumes of mortgages, due to the Funding for Lending scheme.

Group Protection - We expect the next phases of auto enrolment will have further benefit to Group Protection and that the trend for companies to move from self-insured to insured will continue to build. Substantial changes to UK welfare provision from April 2013 will increase awareness of the value of protection for both employers and employees.

Workplace Savings - In 2013, we expect to transfer 75,000 existing scheme members with approximately £0.5bn of assets from large schemes we have won in the past two years. In addition during 2013 we will auto enrol a further 440,000 employees, including by April 2013 over 150,000 employees from Alliance Boots, Asda, the Co-operative Group and Marks & Spencer.

Savings Investments - Delivery of our RDR solution to our partners in November 2012 enabled them to benefit from an early start to RDR. We expected lower sales from building society partners in Q1 2013 from a planned transition phase during which adviser activity is gradually being increased to ensure understanding and compliance with new processes. For those Legal & General advisers who are now fully operational, sales values are approaching similar levels to 2012. Initial feedback suggests customers are comfortable with the charging structure, and 97% of L&G Financial Services' customers have selected the ongoing service option. We expect the impact of transitioning to RDR may extend through at least H1 2013 for the wider advisory market.

US Protection - We expect further progression in market position for LGA as the business continues to widen and deepen reach with the leading broker general agents, who control much of the market flows.

 

BUSINESS REVIEW - HOUSING and PROTECTION

 

Financial highlights	2012	2011
£m
Operational cash generation	279	271
New business strain	(45)	(66)
Net cash generation	234	205
Experience variances, assumption changes, tax and other variances	125	109
Operating profit	359	314
UK Protection new business APE	221	177
UK Protection new business EEV margin (%)	11.8	9.3
Protection gross premiums	1,268	1,200
General Insurance gross premiums	349	304
Total gross premiums	1,617	1,504

innovation grows profit and sales

Operating profit increased by 14% to £359m (2011: £314m) and operational cash generation increased to £279m (2011: £271m). Management of reinsurance and the use of automated underwriting in Retail Protection, with 78% of decisions made at point of sale, contributed to a fall in new business strain to £45m (2011: £66m). This supported the exceptional new business margin of 11.8% (2011: 9.3%).

Retail Protection sales were up 15% to £151m (2011: £131m) and gross premiums were 4% higher at £947m (2011: £914m), with over 50% of applications not linked to a mortgage. We benefit from diversified distribution. We are the sole provider to appointed representatives within the L&G Network and to building society partners who service 87% of customers in that sector. We are also the leading provider of retail protection to Independent Financial Advisers (IFAs).

Group Protection's high quality proposition achieved sales growth of 52% to £70m(2011: £46m) with gross premiums up 12% to £321m (2011: £286m). Auto enrolment has encouraged companies to review their employee benefits and a number have taken our protection products alongside our Workplace pension proposition.

The Legal & General Network is the leading provider of intermediated mortgages with a market share of 25% (2011: 20%). The Network facilitated lending of £19bn in 2012 and was responsible for 1 in 8 UK mortgages. This supports the sales of Retail Protection and General Insurance policies sold alongside the mortgage transaction.

General Insurance gross premiums increased by 15% to £349m (2011: £304m) benefiting from 27% growth from our broker accounts and 36% from direct sales. Despite less favourable weather conditions in 2012, the business delivered a healthy combined operating ratio of 95% (2011: 90%), and an operating profit of £30m (2011: £42m).

Bringing Legal & General Netherlands (LGN) and Legal & General France (LGF) into the division enables them to benefit from closer alignment with the UK Protection business. Sales from LGN and LGF were up 39% to £93m (2011: £67m) and operating profit was £43m (2011: £40m). Operational cash generation of €18m (2011: €17m) represents the sustainable dividends paid from LGN and LGF to the Group.

 

BUSINESS REVIEW - ANNUITIES.

 

Financial highlights	2012	2011
£m
Operational cash generation	243	227
New business surplus	14	35
Net cash generation	257	262
Experience variances, assumption changes, tax and other variances	24	25
Operating profit	281	287
Individual Annuity new business APE	132	105
Bulk Annuity new business APE	102	146
Total annuity new business APE	234	251
Annuities new business EEV margin (%)	8.8	10.0
Annuities assets under management (£bn)	32.2	28.4

 

capability attracting flows

Operational cash generation grew by 7% to £243m (2011: £227m), reflecting the growth in the scale of the business. The Annuities division now has assets under management of £32.2bn, up 13% on 2011 and provides income to 705,000 pensioners (2011: 661,000). Operating profit of £281m (2011: £287m) reflects a reduced new business surplus of £14m (2011: £35m).

Individual Annuities achieved record sales, up 26% to £132m (2011: £105m) as increasing numbers of people reach retirement and defined contribution pension pot sizes continue to grow. Our competitive pricing and diversified distribution allows us to take advantage of this continuing trend.

Legal & General welcomes the FSA's review into annuities. It is important that customers get the best possible outcome from their annuity purchase. More customers shopping around for annuities can only benefit customers and annuity providers, like Legal & General, who are price competitive. In 2012, Legal & General received in excess of 75% of individual annuity sales from external sources.

In the Bulk Annuity market, we wrote 90 policies worth £102m of APE (2011: 85 policies worth £146m). This year included £35m from the Tate & Lyle pension scheme, while last year included £110m from the Turner & Newell pension scheme.

Legal & General's strength in assessing scheme risk and constructing asset portfolios to match scheme liabilities supports a steady flow of interest from companies seeking to reduce risk on their balance sheets.

On 21 February 2013, we completed the largest longevity insurance contract in the UK to date covering 31,000 existing pensioners and £3.2bn of associated liabilities within the BAE Systems 2000 Pension Plan. We reinsured 70% of the liabilities to our partner Hannover Re.

 We have maintained our pricing discipline throughout the year, writing business with the primary aim of achieving our target return on economic capital. On the EEV basis, however, the margin decreased reflecting a shorter duration in the mix of business written than in 2011.

 

Business review - Investment MANAGEMENT

Financial highlights	2012	2011
£m
Total revenue	446	417
Total costs	(203)	(183)
Operating profit	243	234
Net cash generation	197	189
Cost:income ratio (%)	46	44
Gross inflows (£bn)	34.2	32.8
Net inflows (£bn)	7.1	3.0
of which International	7.8	4.5
Closing assets under management (£bn)	406	371
of which International	43	32

 

LGIM INTERNATIONAL POWERS GROWTH

 

LGIM's net inflows of £7.1bn rose to over double the £3.0bn recorded in 2011, benefiting from record gross inflows of £34.2bn. This growth has led to an increase in AUM of 9% to £406bn (2011: £371bn).

LGIM's total revenue increased to £446m (2011: £417m) reflecting the growth in AUM, whilst operating profit increased to £243m (2011: £234m). LGIM continued to invest in the business to support its strategies for growth, while maintaining a strong cost to income ratio of 46%.

LGIM's international operations have grown substantially with net inflows from international clients of £7.8bn(2011: £4.5bn). International assets have increased by 34% to £43bn (2011: £32bn) and now account for over 10% of LGIM's total AUM. Growth has been driven by developing our reach with major pension funds in the US and building our distribution capability in the Gulf, Europe and Asia.

In the US, LGIM America's (LGIMA) excellent active fixed income performance and its ability to offer a full spectrum of Liability Driven Investment (LDI) solutions has attracted 23 new external clients in 2012. LGIMA now has 39 external clients (2011: 16) and AUM of $33bn (2011: $24bn). LGIMA's core capabilities in active fixed income and LDI solutions match the accelerating demand from US pension funds for better liability matching.

In the Gulf and Europe, LGIM has successfully increased gross inflows to £5.5bn in 2012 (2011: £4.2bn). We have extended distribution capability for these regions, where we are attracting growing interest in LGIM's index, fixed income and property funds. LGIM also won its first mandate from Asia during 2012.

For the evolving UK pensions market, LGIM has continued to support the de-risking of defined benefit (DB) pension schemes. LGIM has delivered innovative index strategies, continued to achieve excellent performance in active fixed income and met demand for closer liability matching through a market leading LDI proposition.

In the UK defined contribution (DC) market, LGIM attracted £0.6bn of net inflows and AUM grew by 19% in 2012 to £25.4bn (2011: £21.3bn). The launch of new DC funds together with the first phase of auto enrolment has accelerated momentum and LGIM has attracted strong flows from Legal & General's Workplace platform and external corporate clients.

 

index CAPABILITIES

Asset movements £bn	UK equities	Int'l equities	Fixed interest	Total
Assets under management (at 1 January 2012)	63.3	82.2	78.7	224.2
Gross inflows	3.4	10.1	8.9	22.4
Gross outflows	(6.1)	(6.4)	(7.1)	(19.6)
Net flows	(2.7)	3.7	1.8	2.8
Market and other movements	3.6	12.9	(0.3)	16.2
Assets under management (at 31 December 2012)	64.2	98.8	80.2	243.2

 

Index remains core to LGIM's business model and, with assets of £243bn, it accounts for 60% of total AUM. LGIM has extended its index capability to offer clients the ability to track indices based on measures other than the market capitalisation of the securities in those indices.

 

LGIM delivered significant enhancements to its DC proposition in 2012. To meet the needs of pension savers at the growth phase of their plans, LGIM launched three diversified funds, which blend equity, fixed income and alternative asset classes. Employees of 30 companies have invested significant funds into the Multi-Asset Fund. As part of our commitment to existing clients, LGIM also restructured its pre-retirement fund to ensure continuing alignment with its core objective.

 

 

LDI and active capabilities

Asset movements £bn	LDI	Fixed interest	Equities	Property & other	Total
Assets under management (at 1 January 2012)	58.4	72.4	7.2	9.0	147.0
Gross inflows	5.7	6.0	-	0.1	11.8
Gross outflows	(3.4)	(4.0)	-	(0.1)	(7.5)
Net flows	2.3	2.0	-	-	4.3
Market and other movements	3.3	7.8	0.5	(0.1)	11.5
Assets under management (at 31 December 2012)	64.0	82.2	7.7	8.9	162.8

 

LGIM continues to see demand for its LDI solutions from UK and US DB pension schemes looking to de-risk. The business has grown rapidly, with LDI AUM more than doubling over the last five years to £64bn (2011: £58bn).

The excellent performance achieved by LGIM's active fixed income products, where the majority of funds have outperformed their benchmark over one, three and five years, has generated significant levels of new business. Net active fixed income inflows increased by 25% to £2.0bn (2011: £1.6bn) and AUM is now £82bn (2011: £72bn).

Business review - Savings.

Financial highlights	2012	2011
£m
Operational cash	179	174
New business strain	(62)	(63)
Net cash generation	117	111
Experience variances, assumption changes, tax and other variances	16	15
Operating profit	133	126
New business APE	1,456	1,262
Net flows (£bn)	(0.6)	1.2
New business strain % PVNBP1	1.6	2.7
Assets under administration (£bn)	70	65
1. UK Insured Savings business.

 

platform flows plus cost efficiency driving performance

New business sales were a record £1.5bn (2011: £1.3bn), up 15% as we delivered on our growth strategy of seizing the opportunities created by pension scheme reorganisations driven by the advent of auto enrolment. Our Workplace Savings business had an outstanding year with pension sales more than double 2011 levels at £614m (2011: £269m) and net inflows of £1.6bn (2011: £0.9bn). As at the end of 2012, we had secured over 300 pension schemes, with nearly 150,000 contributing members and a potential auto enrolment population in excess of 500,000 employees.

Assets under administration (AUA) reached a new high of £70bn (2011: £65bn) up 8%. Net flows of £(0.6)bn reflect expected levels of net outflows on legacy with-profit products of £2.2bn, which have been largely offset by the strong net inflows from Workplace Savings.

Platforms are playing an important role in the UK savings landscape and we are benefiting from investment in Workplace and Investor Portfolio Service (IPS) platforms. In 2012, our Workplace platform grew 58% to £6.0bn (2011: £3.8bn), and our IPS platform grew to £8.6bn (2011: £6.8bn) of combined mutual fund and insured assets.

Net cash generation was up 5% to £117m (2011: £111m) as a result of the continuing success of our strategy of growing the scale of our Savings business and driving efficiency with new business strain once again lower at 1.6% of Present Value of New Business Premiums (PVNBP).

Operating profit was up 6% to £133m (2011: £126m) and was delivered alongside record sales and investment into auto enrolment and RDR digital solutions.

 

Successful delivery of rdr strategy

We executed our strategy for the post-RDR marketplace and our IPS platform provides an economic and compliant model for advice and supports advisers to have more time for client fee generating activity. During 2012, we consolidated our position in the building society sector and are the sole savings provider to Nationwide, Yorkshire, Leeds and Principality Building Societies and a number of other societies. These relationships give us access to 1,200 UK branches covering 20 million customers. We believe the new RDR regime will increase the role of the Building Society sector in providing effective financial advice to mass market and mass affluent customers and lead to increased flows into passive funds.  We successfully deployed our RDR solution early in November 2012 to our Building Society partners. This enabled our partners to transition to an efficient and compliant RDR advice model.

 

Asset movements £bn	Insured Savings	Savings Investments	With-profits	Total
Assets under administration (at 1 Jan 2012)	19.1	25.3	20.5	64.9
Gross inflows	3.7	5.5	0.8	10.0
Gross outflows	(3.1)	(4.5)	(3.0)	(10.6)
Net flows	0.6	1.0	(2.2)	(0.6)
Market movements	1.9	2.1	1.8	5.8
Assets under administration (at 31 Dec 2012)	21.6	28.4	20.1	70.1
Financial summary
£m
Net cash generation 2012	46	19	52	117
Net cash generation 2011	38	22	51	111
Operating profit 2012	48	16	69	133
Operating profit 2011	34	23	69	126

 

Insured Savings - WORKPLACE MOMENTUM

We are developing Workplace Savings as a key distribution channel. In 2012, Workplace Savings secured a further 174 schemes (2011: 133 schemes) and we have now won six of what we believe are the twelve largest auto enrolment schemes. In the last quarter of 2012, we successfully auto enrolled over 60,000 employees and to date opt out rates have been less than 10%. At 31 December 2012, we had 381,000 customers on our Workplace pensions platform.

Net flows from Workplace were £1.6bn in 2012 (2011: £0.9bn). In 2013, we expect to transfer 75,000 existing scheme members with approximately £0.5bn of assets as we continue to load the large schemes we have won in the past two years. In addition, we will auto enrol a further 440,000 employees during 2013, including over 150,000 employees from Alliance Boots, Asda, Co-op and Marks & Spencer by April.

During 2013, employers with between 50,000 and 500 employees are required to auto enrol their staff. We continue to quote for schemes within this size that have yet to choose a scheme provider for auto enrolment.

Insured Savings new business strain as a percentage of PVNBP has reduced further to 1.6% (2011: 2.7%), down from 5.5% just four years ago. This significant reduction has been driven by our efficient, scalable Workplace Savings operating model. Highly automated processes have driven efficiency.

Savings Investments - transitioning model

Savings Investments sales were lower at £598m (2011: £688m). We pulled back sales of structured products as pricing and pay-off structures have been less suitable for customers in a low interest rate environment; as a result sales were £25m (2011: £102m). Sales of retail funds were lower at £216m (2011: £294m), as a result of advisers spending time preparing for RDR. However, we increased assets administered on our IPS platform, gaining strong net inflows of collectives of £1.2bn (2011: £1.2bn).

We have consolidated the positioning of our SIPP proposition with sales of £77m (2011: £80m) and strong net inflows of £0.5bn in Suffolk Life. We are beginning to see consolidation in the SIPP market and Suffolk Life is well placed to take advantage with a high quality proposition.

WITH-PROFITS SAVINGS - MATURING ENDOWMENTS IN LINE WITH EXPECTATION

With-profits Savings operating profit was resilient at £69m (2011: £69m). Net outflows of £2.2bn reflect expected maturing endowment policies sold in the 1980s, resulting in AUA of £20.1bn (2011: £20.5bn.

 

Business review - US Protection

Financial highlights	2012	2011
$m
Operating profit1	156	155
Net cash generation	63	58
Gross premium income	922	836
New business APE	142	111
New business EEV margin (%)	11.8	10.7
1. In 2012, the Group applied the new US accounting policy on the recognition of Deferred Acquisition Costs (DAC) which changed the rules on capitalising costs incurred in acquiring insurance business. Applying this retrospectively reduced the opening 2012 shareholders' equity of the Group (and LGA) by $216m and lowered 2012 operating profit by $12m (2011: $5m). This has no effect on EEV or IGD surplus. Details of the adjustment are outlined in note 2.19.

 

execution of capital programme supports growth

Legal & General America (LGA) delivered record sales with 28% growth to $142m (2011: $111m) and has grown its core term product over 12 consecutive quarters. This success is through the delivery of LGA's focus on extending distribution reach through key brokerage agents in the US market. LGA is now a top five writer of term assurance in the US, from outside the top 10 just three years ago.

New business margin improved to 11.8% (2011: 10.7%) with LGA benefiting from growth in scale and improved cost efficiencies.

The capacity for sales growth has been possible through the delivery of the US capital efficiency programme. In 2012, LGA completed a further two phases of this programme, by utilising internal reinsurance to provide a capital benefit to LGA of $545m and a benefit of £260m to the Group's IGD. Since the programme started in 2010, the capital benefit to LGA has been $735m and the benefit to the Group's IGD has been £402m. This capital programme has enabled LGA to grow its new business sales by 87% since 2009 and increase new business margin to 11.8% from 4.9% in 2009.

We will continue to focus on using LGA capital efficiently. In the next year we anticipate releasing the excess capital on the 2013 new business that arises as a result of the XXX/AXXX reserving regime in the US. We will assess and execute transactions on the back book of policies in future years.

Growth in sales helped gross premiums increase 10% to $922m (2011: $836m) and operating profit is now $156m (2011: $155m).

Operational cash generation for LGA is the sustainable dividends paid to the Group. Operational cash generation has continued to grow to $63m in 2012 (2011: $58m). In March 2013 LGA paid an ordinary dividend to the Group of $66m. This dividend will be recognised as operational cash generation in the Q1 2013 results.

BUSINESS REVIEW - GROUP BUSINESS UNIT

group capital and financing

Financial highlights	2012	2011
£m
Investment return	168	191
Interest expense	(127)	(123)
Investment expenses and unallocated corporate expenses	(19)	(17)
Group capital and financing operating profit	22	51
Operational cash generation	20	44
Closing Group capital and financing assets	4,741	4,344
Closing outstanding borrowings	2,784	2,732

 

 

The Group capital and financing segment contains Legal & General's shareholder funds and Group borrowings. These assets provide liquidity and capital support centrally.

The smoothed investment return on the investment portfolio of £168m (2011: £191m) is calculated asset class by asset class and equates to an annualised average smoothed investment return of 3.9% (2011: 4.7%) on the average balance of invested assets of £4.3bn (2011: £4.0bn). The fall in the average investment return is predominantly due to the reduction of assumed returns on UK equities to 5.8% (2011: 7.5%).

Interest expense of £127m (2011: £123m) reflects the average cost of debt of 4.9% per annum (2011: 4.8%) and on average nominal value of debt balances of £2.6bn (2011: £2.6bn).

The £4.7bn (2011: £4.3bn) investment portfolio follows a diversified multi-asset strategy. At the end of 2012, the portfolio had £3.1bn invested in cash and high quality sovereign and corporate bonds, a further £1.4bn invested in equities, with the remainder in property and other assets. Late in 2012 we increased exposure to higher emerging market growth, tactically implemented equity protection to reduce volatility and increased diversity of active managers.

The year end balance of £2.8bn Group borrowings contains £2.5bn of long term financing and £0.3bn of short term borrowings. The earliest bond call or maturity date is 2015.

Legal & General has a well established commercial paper programme, providing the Group with access to short term funds from the Sterling and Euro capital markets. In addition, Legal & General's £1bn revolving credit facility is provided by a diversified syndicate of 21 of the Group's key relationship banks. The facility will mature in 2017 with the option to extend through to 2018. No drawings have been made under this facility to date.

asset exposures

 

Asset portfolio	2012		2011
£bn	LGPL1	Total	LGPL1	Total
Bonds:	29.2	34.9	26.3	32.2
Sovereigns:
UK and US	3.5	4.0	3.1	4.0
GIIPS2	0.2	0.4	0.2	0.3
Other countries	0.8	1.9	0.8	1.9
Banks:
UK and US	1.7	2.2	2.2	2.8
GIIPS2	0.1	0.1	0.1	0.1
Other countries	0.5	0.9	0.6	0.9
Other bonds
UK and US	14.8	17.2	13.1	15.6
GIIPS2	0.8	0.8	0.7	0.7
Other countries	6.8	7.4	5.5	5.9
Property	0.7	0.8	0.5	0.6
Equities	-	1.4	-	0.9
Derivatives	2.9	3.1	2.9	3.4
Cash and cash equivalents	0.5	2.7	0.3	2.3
Total Asset Portfolio	33.3	42.9	30.0	39.4
1. LGPL is the main operating subsidiary for the UK's annuity business.
2. GIIPS represents Greece, Italy, Ireland, Portugal and Spain.

 

The investment strategy of Legal & General's asset portfolio has clear long term objectives in order to match the long dated nature of liabilities, manage credit risk and gain economic value. The performance of the portfolio is actively managed by LGIM against these objectives with continual refinement as market conditions evolve.

Legal & General's main investment exposure is in LGPL. During 2012, we took advantage of the general contraction of credit spreads to further reduce our exposure to subordinated bank debt in LGPL, which now represents only 2.8% of the portfolio (2011: 4.7%). LGPL has minimal exposure to GIIPS sovereign debt of £240m, all within Italy and exposure to GIIPS bank debt is similarly small at £52m. The proceeds from disposals and new premiums into LGPL were invested in a combination of UK Gilts, corporate bonds issued by companies in non-cyclical sectors and direct investments, including secured commercial lending.

Infrastructure is a key developing sector for Legal & General. In addition to the £1.6bn LGPL held in infrastructure bonds at the end of 2012, we accelerated our exposure to direct investments. By the end of 2012, we had directly invested almost £1.2bn into projects including the Football Association's National Centre in Burton upon Trent, Tesco's distribution hub in Reading and student accommodation in Southampton, Greenwich and Imperial College.

In LGPL, we maintain a provision of £1.7bn, equivalent to 60bps per annum over the life of the portfolio, to provide for the risk of credit default. Over the last five years we have suffered defaults of less than £60m. During 2012 we suffered a minor default, our first for three years, on a bond with a nominal value of less than £1m. We expect to recover greater than 80% of the value of the bond.

GROUP TAX RATES - EFFECTIVE TAX RATE of 22.7%

Equity holders' effective tax rate	2012	2011
%
Total Effective Tax Rate	22.7	24.3
Annualised rate of UK corporation tax	24.5	26.5

 

In 2012, 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.

 

CHANGES TO THE UK CORPORATION TAX REGIME FOR LIFE INSURERS

 

A new regime for the taxation of life assurance companies came into effect on 1 January 2013, and our project to implement the changes has been successfully completed. There is no material impact from the changes on IFRS profits and EEV is improved by £14m.

DEFERRED TAX ASSET UTILISATION

 

Deferred tax	2012	2011
£m
Excess and deferred expenses (XSE)	217	209
Capital losses	14	147
Trading losses	127	159
Other	(42)	(22)
UK net deferred tax asset	316	493

The utilisation of trading losses is partly reflected within the Protection and Annuities business where it has contributed £72m in 2012 (2011: £80m) to net cash generation. It is expected that trading losses will continue to be available to the Protection and Annuities business into 2014 and possibly beyond.

BUSINESS REVIEW - CASH GENERATION

The sources of our cash generation are transparent and the table below highlights the cash generation by segment.

		2012				2011
£m		Op cash	Strain	Net cash		Op cash	Strain	Net cash
Annuities		243	14	257		227	35	262
UK Protection		240	(45)	195		232	(66)	166
Insured Savings		108	(62)	46		101	(63)	38
With-profits		52		52		51		51
US Protection		40		40		35		35
European dividends		14		14		16		16
Sub total		697	(93)	604		662	(94)	568
Savings Investments		19		19		22		22
GI and Other risk		25		25		23		23
LGIM		197		197		189		189
GCF		20		20		44		44
Total cash generation		958	(93)	865		940	(94)	846

 

At the beginning of 2012 we provided operational cash generation guidance of £695m for the Annuities, UK Protection, Insured Savings and With-profits businesses and US and European dividends. The 2012 operational cash generation of these businesses was in line with this guidance at £697m. For 2013, growth of 6% is forecast to around £735m.

 

clear linkage between cash generation and earnings

Operational cash generation from operating divisions (i.e. net of Group capital and financing) increased 5% to £938m (2011: £896m) and net cash generation from business lines increased to £845m (2011: £802m). After allowing for operational cash generation from group capital and financing, which reduced to £20m (2011: £44m) largely as a result of lower assumed returns on UK equities of 5.8% (2011: 7.5%), total net cash generation was £865m (2011: £846m).

The table below highlights the clear linkage between the operational and net cash generation of the business, and the profit of the Group.

£m	Op cash	Strain	Net cash	Variances and other	Profit after tax	Tax	Profit before tax
Annuities	243	14	257	(45)	212	69	281
Housing and Protection	279	(45)	234	35	269	90	359
Investment mgt	197	-	197	-	197	46	243
Savings	179	(62)	117	(17)	100	33	133
US Protection	40	-	40	22	62	37	99
GCF	20	-	20	(2)	18	4	22
Investment projects	-	-	-	(38)	(38)	(12)	(50)
Operating profit	958	(93)	865	(45)	820	267	1,087
Variances and other	-	-	-	(19)	(19)	(32)	(51)
Total	958	(93)	865	(64)	801	235	1,036
Per share	16.37		14.78		13.90
Dividend per share			7.65		7.65
Dividend coverage			1.91		1.80

 

cash generation backed by dividends to group

 In 2012, 89% of the net cash generation of the divisions was distributed to the Group (2011: 87%). This demonstrates the fungible and liquid nature of the cash generated by the divisions. It is the intention that the business units will continue to distribute a substantial part of their net cash generated to the Group in 2013.

 

£m	2012			2011
	Net cash £m	Dividend £m	Dividend % of cash	Net cash £m	Dividend £m	Dividend % of cash
Annuities	257	539	89	262	516	89
Housing and Protection	234			205
Savings	117			111
Investment management	197	175	89	189	150	79
US Protection	40	40	100	35	35	100
Sub total	845	754	89	802	701	87
Group capital and financing	20			44
Total	865	754	87	846	701	83

 

CASH GENERATION translated inTO shareholder assets

 

Total shareholder assets, which include Group capital and financing assets and other shareholder assets, increased by £0.6bn to £6.5bn (2011: £5.9bn) as a result of the Group's strong cash generation. Shareholder assets have now increased by 55% from the £4.2bn held at the beginning of 2010. The table below demonstrates the strong link between our cash generation metric and shareholder assets in our balance sheet.

 

Shareholder Assets	2012	2011
£m
Opening Group capital and financing assets	4,344	3,656
Opening shareholder assets in other subsidiaries	1,588	1,688
Opening shareholder assets	5,932	5,344
Group operational cash generation	958	940
New business strain	(93)	(94)
Net cash generation	865	846
External dividend payments in the year	(394)	(298)
Other	123	40
Closing Group capital and financing assets	4,741	4,344
Closing shareholder assets in other subsidiaries	1,785	1,588
Closing shareholder assets	6,526	5,932

 

BUSINESS REVIEW - BALANCE SHEET

Capital resources - Stable and Strong Balance Sheet

As at 31 December 2012 the Insurance Group's Directive (IGD) surplus was £4.1bn (2011: £3.8bn).

The Group's capital resources totalled £7.2bn, covering the capital resources requirement of £3.1bn by 2.34 times. This capital buffer is in addition to the £1.7bn of LGPL credit default provision and is after allowing for the accrual of the 2012 final dividend of £336m.

Capital	2012	2011
£bn
Group capital resources	7.2	6.9
Group capital resources requirement	3.1	3.1
IGD surplus1	4.1	3.8
Coverage ratio %	234	220

 

The IGD capital position reflects regulatory reporting, i.e. Pillar 1 for the UK firms and international regulatory reporting for the overseas subsidiaries. The table below demonstrates how the Group's net cash generation flows through to the IGD capital position.

 

IGD Surplus1
£bn
At 1 January 2012	3.8
Operational cash	1.0
New business strain	(0.1)
2012 dividend	(0.5)
Experience variances, assumption changes and other variances	(0.1)
Increase in UK capital requirement	(0.2)
Release of capital from US capital programme	0.3
Other regulatory adjustments2	(0.1)
At 31 December 2012	4.1

1. All IGD amounts are estimated, unaudited and after accrual of the final dividend of £336m (2011: £279m).

2. Includes £(72)m resulting from the utilisation of trading losses included in net cash.

 

The Group capital resources requirement is analysed in the table below.

Pillar 1 capital requirement	2012	2011
£bn
Protection and Annuities	1.9	1.7
Savings	0.1	0.1
With-profits - operational	0.6	0.6
Other subsidiaries	0.4	0.3
Operational group capital resources requirement	3.0	2.7
With-profits insurance capital component (WPICC)1	0.1	0.4
Group capital resources requirement	3.1	3.1

1. This is the result of the mechanical calculation of the capital required in the With-profits fund on the regulatory (Peak 1) and realistic (Peak 2) bases. The interaction between the two bases will give rise, under certain market conditions, to a technical capital requirement called the With-profits insurance capital requirement (WPICC).

 

SUPPLEMENTARY EEV DISCLOSURE

 

EEV highlights	2012	2011
Worldwide new business margin (%)	4.7	5.1
Equity per share including LGIM (pence)	173	167
Equity per share (pence)	151	147
Analysis of EEV results	2012	2011
£m
Contribution from new business	475	441
Expected return from in-force business	448	494
Experience variances and assumption changes	(76)	270
Development costs	(37)	(10)
Contribution from shareholder net worth	145	178
EEV operating profit on covered business	955	1,373
Investment management	216	210
Other businesses (including General Insurance and the Group's finance costs)	(130)	(114)
EEV operating profit	1,041	1,469
Investment variance and economic assumption changes	(194)	(132)
Losses attributable to non-controlling interests	(12)	(3)
EEV profit from ordinary activities before tax	835	1,334
Tax and other	(101)	(103)
EEV profit from ordinary activities after tax	734	1,231
EEV earnings per share (pence)	12.75	21.17

 

EEV operating profit

Although there is a reduction in EEV operating profit to £1,041m (2011: £1,469m), this primarily reflects a number of one-off items in both 2011 and 2012. In 2011, these totalled a positive £270m, whilst in 2012 the impact of regulatory changes in the US contributed to a negative variance of £76m. In addition, 2012 included a lower expected return on in-force, due to the fall in the opening risk discount rate, which reduced operating profit by a further £46m.

Contribution from new business increased to £475m (2011: £441m) primarily due to improved sales and margins in the UK and US Protection business, reflecting greater underwriting efficiency and continuing growth in market share.

EEV PER SHARE

The Group has delivered £734m (2011: £1,234m) of EEV profit after tax, which after external dividend payments of £394m and foreign exchange, pension deficit and other adjustments of £(48)m, increased EEV shareholders' equity to £8,900m (2011: £8,608 m).

The number of shares increased to 5,913m (2011: 5,872m) principally due to the vesting of 3 year "Save As You Earn" (SAYE) options granted to our employees in 2009.

This movement in equity coupled with the increase in the number of shares equates to shareholders' equity per share of 151 pence (2011: 147 pence). Including LGIM's external funds in the calculation increases the EEV per share to 173 pence.

New business contribution

Contribution from new business increased to £475m (2011: £441m) as sales, on a PVNBP basis, increased 20% to £10.2bn (2011: £8.5bn). This increase reflected the impact of the growth in our workplace business on non-profit pension sales and the increase in US and UK protection sales.

Strong cost management, underwriting efficiency, and the benefits of growing scale helped both the UK and US Protection businesses to deliver improved margins in the year. The UK protection business grew margins to an exceptional 11.8% (2011: 9.3%) whilst the US Protection business also delivered an 11.8% margin, up from 10.7% in 2011. Worldwide EEV new business margins reduced slightly to 4.7% (2011: 5.1%) owing to the greater proportion of sales from the Savings business and a lower annuity new business margin, reflecting a shorter duration in the mix of business written than 2011.

EEV EXPERIENCE VARIANCES AND ASSUMPTION CHANGES

2011 experience and assumption changes reflected the impact of a number of one-off items and totalled a positive £270m.

In 2012, experience and assumption changes of £(76)m primarily included the impact of new US reserving requirements (Actuarial Guidance 38).

LGIM is reported on an IFRS basis. Operating profit of £216m (2011: £210m) excludes £27m (2011: £24m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a "look through" basis and as a consequence are included in the Protection, Annuities and Savings covered businesses on an EEV basis.

investment variances and economic assumption changes

Investment variance and economic assumption changes of £(194)m primarily reflects the impact of increases in long duration and falls in short duration interest rates on the reinvestment and divestment assumptions, coupled with higher cost of capital from lower assumed returns on shareholder assets.

monetisation of value in-force

The monetisation of the Group's Value In-force (VIF) will form the basis of future profits and operational cash generation of the Annuity, Protection and Insured Savings businesses. The ageing profile of the undiscounted VIF monetisation is given in the table below:

 

Estimated monetisation of UK VIF (undiscounted)1	2013 - 2017	2018 - 2022	2023 - 2027	Beyond 2027
UK VIF monetisation	30%	20%	13%	37%

 

The table below illustrates how the discounted and undiscounted VIF have increased throughout the year.

 

Reconciliation of UK long term Risk and Savings VIF	Discounted	Undiscounted1
£bn
Opening VIF at 1 January 2012	4.2	8.4
Contribution from new business	0.4	0.8
Unwind of discount rate	0.2	n/a
Expected release from non profit and with-profits businesses2	(0.6)	(0.6)
Closing operational VIF at 31 December 2012	4.2	8.6
Experience variances / assumption changes	-	0.1
Investment variance / economic assumption changes	-	-
Other	0.2	0.1
Closing VIF at 31 December 2012	4.4	8.8

1. Management estimates.        

2. Comprises the expected release from non profit business of £591m and with-profits transfer of £52m.

 

ADDITIONAL VALUE OF LGIM

Within the calculation of Group embedded value, LGIM profits on internally sourced business are included on a look through basis at £0.2bn (2011: £0.2bn), equivalent to 4p per share (2011: 4p per share).

 

The external assets component of LGIM is included at the IFRS net asset value of £0.4bn (2011: £0.4bn), equivalent to 6p per share (2011: 6p per share).

 

Including the external assets component of LGIM on an embedded value basis would increase the contribution of LGIM to the Group embedded value from £0.6bn (10p per share) to £1.9bn (33p per share). In line with the rest of the Group, the embedded value for LGIM excludes any value for future new business and as such is lower than the true valuation of the company.

 

Estimated LGIM discounted cash flow valuation	2012	2012
	p per share	£bn
Look through value of profits on covered business	4	0.2
Net asset value	6	0.4
Current value of LGIM in Group embedded value	10	0.6
LGIM VIF	23	1.3
Alternative discounted value of LGIM future cash flows	33	1.9

 

Including LGIM, this scenario equates to an indicative valuation per share of 173 pence.

 

Indicative valuation including LGIM	2012	2012
	p per share	£bn
EEV as reported	150.5	8.9
LGIM VIF	22.8	1.3
Total including LGIM	173.3	10.2

 

PRINCIPAL RISKS AND UNCERTAINTIES

Legal & General runs a portfolio of risk-taking businesses; we accept risk in the normal course of business and aim to deliver sustainable returns on risk based capital to our investors in excess of our cost of capital. We manage the portfolio of risk that we accept so as to build a sustainable business 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 is exposed to a number of key risk categories.

 

regulatory and legislation

PRINCIPAL UNCERTAINTY  AND POTENTIAL IMPACT		MITIGATION, trend and outlook
Changes in regulation or legislation may have a detrimental effect on our strategy or profitability.   Legislation and government fiscal policy can influence our product design, the period of retention of products and our required reserves for future liabilities. Regulation defines the overall framework for the design, marketing and distribution of our products; and the prudential capital that we hold. The nature of long term business can result in some changes in regulation having a retrospective effect on our businesses.		We seek to actively participate with Government and regulatory bodies in the UK and Europe to assist in the evaluation of change so as to develop outcomes that meet the needs of all stakeholders. Internally, we evaluate the impact of all legislative and regulatory change as part of our formal risk identification and assessment processes, with material matters being considered at the Group Risk Committee and the Group Board.   2012 has the seen the successful delivery of our Retail Distribution Review (RDR) proposition together with the transition of our business partners to the new regime. We have also delivered the core components of our Solvency II (SII) programme. However, there remains much uncertainty both to the implementation timescales of SII and the final calibrations that will be used for long term business. The regulatory change agenda also continues with the transition of the FSA into the Prudential Regulatory Authority and Financial Conduct Authority. Whilst the high level approaches of the respective bodies have been published, the potential remains that their new rule books present unintended consequences to the insurance sector and that a more aggressive supervision and enforcement regime lead to increased capital requirements and increased costs in meeting regulatory requirements. Other areas of significant regulatory change include further regulation of the UK mortgage market and the EU Packaged Retail Investment Products directive.

 

Investment market performance or conditions in the broader economy may adversely impact our earnings and profitability.   The performance and liquidity of investment markets, interest rate movements and inflation can impact the value of the investment assets we hold to meet the obligations arising from insurance business as well as the value of the obligations themselves, resulting in mismatches in the profile of cash flows of our assets and liabilities. In addition, significant falls in investment values can also impact the fee income of our investment management business. Broader economic conditions can impact the timing of the purchase and the period of retention of retail financial services products.

We model our business plans across a broad range of economic scenarios and take account of alternative economic outlooks within our overall business strategy. As part of our medium-term plan we have sought to ensure focus upon those market segments that will be resilient in projected conditions.   Although investment markets have shown a strong recovery in 2012 and early 2013, the outlook for the global economy continues to remain uncertain. Rates of economic growth look set to be subdued and macro-economic policy responses are likely to drive a prolonged period of low interest rates. While EU governments have acted to stabilise the Euro zone, there remains potential for shocks to global financial markets, which in extreme could impact our ability to execute hedging strategies that ensure the profile of our asset and liability cash flows are appropriately matched.

 

INDUSTRY CHANGE

The Group may not maximise opportunities from structural and other changes within the  financial services sector.   The financial services sector continues to go through a period of change. Significant changes in the markets in which we operate may require the review and realignment of elements of our business strategy. A failure to be sufficiently responsive to potential change and understand the implication to our businesses, or the incorrect execution of change, may impact the achievement of our strategic objectives.

We seek to ensure we have market leading expertise in the core fields in which we operate, and actively focus on retaining the best personnel with the knowledge to design and support our products. We have re-aligned our internal organisation to fully support our ambition, including the development of our digital capabilities.   The UK Government continues to focus on a broad range of changes to the provision of state benefits including changes to the state pension. Such changes will impact the way in which consumers approach protecting their income and planning for their retirement. The distribution landscape is also expected to continue to evolve post the implementation of RDR, presenting a range of opportunities.

Counterparty andthird party risks

In dealing with issuers of debt and other types of counterparty, the Group is exposed to the risk of default.   A default event within the banking sector, or a major sovereign debt event, could result in dislocation of bond markets, significantly widening credit spreads, and in extreme conditions may result in default of strongly rated issuers of debt, requiring us to increase our default provisions.   We also have exposures to banking, money market and reinsurance counterparties, and the providers of settlement, custody and other bespoke business services to the Group, a failure of which could expose us either to financial loss or short term operational disruption of our business processes.

We actively manage our exposure to default risks, setting robust counterparty selection criteria and exposure limits. We continue to diversify the asset classes backing our annuities business, to include the use of property lending, sale and leaseback and infrastructure assets. Our service providers are also subject to rigorous selection criteria.   Over 2012, credit spreads have begun to normalise reflecting increased market confidence in the issuers of investment grade bonds, whilst within Legal & General we continue to experience a very low level of actual defaults. However, while we assess the occurrence of a major bank default or sovereign event as being a more extreme outcome than in previous years, the risk and associated uncertainties remain. The current economic environment also presents an increased risk that suppliers of business services may be unable to meet their obligations.

UK Financial Services Sector Contagion Risks

As a UK-based Group, our earnings are influenced by the performance and perception of the UK financial services sector as a whole.   The financial crisis, subsequent investment performance and low interest rate environment, together with consumers' perceptions of the robustness of financial institutions may impact consumer attitudes to long term savings. Recent regulatory actions, for example in the banking sector with regard to Payment Protection Insurance (PPI), may also adversely impact consumers' perception of the value of insurance products and result in changes to the regulatory and legislative environment in which we operate.

We actively manage our brand and seek to differentiate our business model from that of our competitors, focusing on our customers' needs through a diversified portfolio of risk, savings and investment businesses. We also engage with our regulators to support understanding of the risk drivers in the markets in which we operate.   As a significant participant in the long term savings markets, we are inherently exposed to the risk of a downturn in new business volumes and changes in policy persistency as a consequence of consumer sentiment. We are also exposed to the risk of increased costs of regulatory compliance through regulatory and legislative responses to events in the banking sector being read across to insurers without reference to the different business models.

Mortality, Catastrophe and other assumption uncertainties

Reserves for long term business may require revision as a result of changes in experience, regulation or legislation.   The writing of long term insurance business necessarily requires the setting of assumptions for long term trends in factors such as mortality, persistency, valuation interest rates, expenses and credit defaults. The frequency of extreme events may result in the need to recalibrate these assumptions. Forced changes in reserves can also be required by regulatory or legislative intervention in the way that products are priced.

We undertake significant analysis of longevity and mortality risks to ensure an appropriate premium is charged for the risks we take on and that our reserves remain appropriate. We remain focused on developing a comprehensive understanding of annuitant mortality and we continue to evolve and develop our underwriting capabilities. The sensitivities of our UK Long term Business to annuitant mortality are set out in note 2.15. We also continue to ensure that legislators recognise the benefits to consumers of pricing insurance products based on the risk factors that each policy presents.   Whilst we regularly appraise the assumptions underpinning the business that we write using both external and our own mortality data, extreme events, such as a rapid advance in medical science leading to significantly enhanced annuitant longevity or an event causing widespread mortality/morbidity remain inherent risks to our business. Following the implementation of EU gender neutral pricing legislation in the UK, there also remains potential for further legislation to price insurance products irrespective of other risk factors, such as age or disability.

business process risks

A material failure in our business processes may result in unanticipated loss or reputation damage.   We have constructed our framework of internal controls to minimise the risk of unanticipated loss or damage to our reputation. However, no system of internal control can completely eliminate the risk of error, financial loss, fraudulent actions or reputational damage.

Our "three lines of defence" risk governance model seeks to ensure that business management take an active part in developing an appropriate control environment for the risks implicit in business processes they manage, with expert advice and guidance from Risk Management. Our internal audit function provides independent assurance on the adequacy and effectiveness of our controls. The report of the Group Audit Committee within the 2012 Report and Accounts outlines its work during the year in reviewing our internal control system.   As our business grows we continue to invest in our system capabilities and business processes to ensure that we meet the expectations of our customers, comply with regulatory, legal and financial reporting requirements and mitigate the risks of loss or reputational damage from operational risk events.

ENQUIRIES

Investors:

 

Kate Vennell	Head of Investor Relations	020 3124 2150
Ian Baker	Investor Relations Manager	020 3124 2047

 

Media:

 

John Godfrey	Group Communications Director	020 3124 2090
Richard King	Head of Media Relations	020 3124 2095
Anastasia Shiach	Tulchan Communications	020 7353 4200
Michelle Clarke	Tulchan Communications	020 7353 4200

 

Notes

 

A copy of this announcement can be found in "Results", under the "Financial information" section of our shareholder website at http://www.legalandgeneralgroup.com/investors/results.cfm.

 

A presentation to analysts and fund managers will take place at 10.00 GMT today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of the presentation which can be accessed at http://investor.legalandgeneral.com/results.cfm. A replay will be available on this website later today.

 

There will be a live listen only teleconference link to the presentation. Details below:

 

 

Participant dial-in numbers
Location you are dialling in from	Number you should dial
UNITED KINGDOM	0800 368 0649
All other locations	+ 44 20 3059 8125

 

Financial Calendar 2013	Date
Ex dividend date	24-Apr-13
Record date	26-Apr-13
Annual general meeting	22-May-13
Payment date of 2012 interim dividend	29-May-13
Q1 Interim Management Statement 2013	02-May-13
Half-year Results 2013	06-Aug-13
Q3 Interim Management Statement 2013	05-Nov-13

 

The Preliminary Results for the year ended 31 December 2012 do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The Group's statutory accounts for 2011 and 2012 have been audited by PricewaterhouseCoopers LLP and their reports were unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006. The Group's 2011 statutory accounts have been filed with the Registrar of Companies.

 

Forward-looking statements

 

This announcement may contain certain forward-looking statements relating to Legal & General, its plans and its current goals and expectations relating to future financial condition, performance and results. By their nature, forward-looking statements involve uncertainty because they relate to future events and circumstances which are beyond Legal & General's control, including, among others, UK domestic and global economic and business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory and Governmental authorities, the impact of competition, the timing impact of these events and other uncertainties of future acquisition or combinations within relevant industries. As a result, Legal & General's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in these forward-looking statements and persons reading this announcement should not place reliance on forward-looking statements. These forward-looking statements are made only as at the date on which such statements are made and Legal & General Group Plc does not undertake to update forward-looking statements contained in this announcement or any other forward-looking statement it may make.

 

DIRECTORS RESPONSIBILITY STATEMENT (EXTRACTED FROM THE 2012 ANNUAL REPORT AND ACCOUNTS)

 

The directors are responsible for preparing the Directors' Report, the Directors' Report on Remuneration and the Group and Company financial statements in accordance with applicable law and regulations.

 

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). In preparing the Group financial statements, the directors have also elected to comply with IFRSs issued by the International Accounting Standards Board (IASB).

 

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the directors are required to:

 

·    select suitable accounting policies and then apply them consistently;

·    make judgements and accounting estimates that are reasonable and prudent;

·    state whether IFRSs as adopted by the European Union and IFRSs issued by IASB, and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the group and Company financial statements respectively; and

·    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

 

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors' Report on Remuneration comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Each of the directors confirms that, to the best of his knowledge:

·    the financial statements, which have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the Group as a whole; and

 

·    the Directors' Report includes a fair review of the development and performance of the business and the position of the Company and the Group as a whole, together with a description of the principal risks and uncertainties that they face.

 

Each of the directors whose names and functions are listed below confirms that, so far as he is aware, there is no relevant audit information of which the Company's auditors are unaware and each of the directors has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of such information. This confirmation is given in accordance with section 418(2) of the Companies Act 2006.

 

 

J. M. Stewart	Chairman	N .Prettejohn	Non Executive Director
N.D. Wilson	Group Chief Executive	H. E. Staunton	Non Executive Director
M.E. Fairey	Non-Executive Director	J. S. Wilson	Non Executive Director
Dame C.H.F. Furse	Non-Executive Director	M. J .Zinkula	CEO LGIM
M.J. Gregory	CEO Savings
R.H.P. Markham	Non-Executive Director
J. B. Pollock	CEO Protection & Annuities
S.G. Popham	Non Executive Director