L&G Half-year Results 2013 - Part 1

Stock Exchange Release

06 August 2013

 

Legal & General Group Plc Interim Management Report 2013

dividends up 22% and earnings per share up 13%

financial highlights - strong performance: 

 

·                        OPERATIONAL CASH GENERATION UP 14% TO £537M (h1 2012: £471M)
                         Net cash GENERATION up 23% to £500m (h1 2012: £407m)

 

·                        OPERATING PROFIT up 10% to £571M (H1 2012: £518M)

 

·                        Profit before tax up 13% to £592m (h1 2012: £523m)

                        Profit after tax up 15% to £464m (H1 2012: £405m)

 

·                        Earnings per share UP 13% to 7.82P (H1 2012: 6.93P)

 

·                        return on equity¹ 16.8% (H1 2012: 15.8%)

 

·                        iNTERIM DIVIDEND UP 22% TO 2.40P PER SHARE (H1 2012: 1.96P PER SHARE)

 

business highlights - accelerating growth: 

 

·                        LGIM GROSS FLOWS UP 66% to £24.9bn; net flows UP 100% TO £8.0bn
                        LGIM AUM £433bn (fy 2012: £406BN)

                                       

·                        bULK aNNUITY SALES £670M (h1 2012: £67M)
                        individual annuity sales up 44% to £754m (H1 2012: £522m)

 

·                        savings auA after acquisition of cofunds £111bn² (fY 2012: £70BN)

 

·                        uk protection gross premiums up 3% to £689M (H1 2012: £672m)
                        US protection gross premiums up 10% to $503m (H1 2012: $456m)
                        General insurance premiums up 10% to £183m (H1 2012: £166m)

 

Nigel Wilson, Group Chief Executive, said:

"Legal & General delivered another very strong performance in H1 2013, with double-digit growth in sales, cash, operating profits and profit after tax.  International assets under management are up 21% to £52bn.  Bulk annuities and related retirement solutions for corporates are up ten-fold. We have bought Cofunds, the UK's largest digital savings platform with £54bn assets under administration. The acquisition of Lucida, the UK annuity buy-out company, will add £1.4bn of annuity assets.  We have now invested over £4bn in UK infrastructure and Direct Investments, including in the house builder, CALA Homes.

We are successfully evolving our strategy from a post-financial crisis focus on cash, to one based on cash plus growth plus selective acquisitions.  It is based on five macro-trends: increasingly global asset markets, ageing populations, digital lifestyles, welfare reform and bank retrenchment.  In each case, we have accelerated growth: by expanding international investment management, providing retirement solutions, growing our digital presence, increasing private protection, and direct investments. 

I am excited about the future for Legal & General.  In the last six months, earnings per share are up 13% and we have increased dividends per share by 22%. We remain determined to deliver value to shareholders. We are equally determined to deliver value to our millions of customers. With £433bn of assets under management in LGIM, £111bn assets under administration in Savings, and 8 million customers, we have the scale, strength and skill-sets to provide insurance, savings and investment solutions that work for individuals, families, companies and for 'UK plc'."

 

Financials	H1 2013	H1 2012	Growth
Pence
IFRS earnings per share (basic)	7.82	6.93	13%
Interim dividend per share	2.40	1.96	22%
Return on equity1 (%)	16.8	15.8	1.0 %pts

1.     Annualised return on equity is calculated by taking annualised profit after tax attributable to equity holders of the Company (calculated as twice the half-year number) as a percentage of the average shareholders' capital employed, being an average of the opening and closing shareholders' equity during the period.

2.     H1 2013 Savings assets under administration includes an additional £39bn of assets acquired as part of the purchase of Cofunds in May 2013.

 

FINANCIAL SUMMARY 

 

Financial highlights	H1 2013	H1 2012	Growth (%)
£m
Analysis of operating profit1
Annuities	151	139	9
Housing and Protection	168	150	12
Savings	62	72	(14)
Investment Management	135	119	13
US Protection	53	48	10
L&G Capital	86	81	6
Operating profit from divisions	655	609	8
Group debt costs	(64)	(63)	(2)
Investment projects and expenses	(20)	(28)	29
Operating profit	571	518	10
Investment and other variances (incl. minority interests)	21	5	320
Profit before tax	592	523	13
Operational cash generation	537	471	14
New business strain	(37)	(64)	42
Net cash generation1	500	407	23

 

Flows	H1 2013	H1 2012	Growth (%)
£bn
LGIM gross flows	24.9	15.0	66
LGIM net flows	8.0	4.0	100
Savings net flows	0.1	(0.1)	n/a
Gross premiums	H1 2013	H1 2012	Growth (%)
UK Protection (£m)	689	672	3
General Insurance (£m)	183	166	10
US Protection ($m)	503	456	10
Sales	H1 2013	H1 2012	Growth (%)
£m
Total APE	1,085	889	22
Individual annuity single premiums	754	522	44
Bulk purchase annuity single premiums2	670	67	900
UK Protection annual premiums	105	109	(4)
US Protection annual premiums ($m)	70	66	6
Savings APE	734	620	18
Assets	H1 2013	FY 2012	Growth (%)
£bn
LGIM3	433	406	7
Savings4	111	70	59
Annuities	32	32	-

1.     Operating profit and net cash generation are defined on pages 27 and 65 of the interim management report.

2.     H1 2013 Bulk purchase premiums exclude £175m of premiums from the £3.2bn longevity insurance transaction with BAE Systems.

3.     LGIM assets include £32bn of assets managed on behalf of Annuities and £50bn managed on behalf of Savings.

4.     H1 2013 Savings assets under administration includes £39bn of additional assets acquired as part of the purchase of Cofunds in May 2013.

 

FINANCIAL HIGHLIGHTS - STRONG PERFORMANCE

Legal & General delivered excellent growth in operational and net cash generation, operating profit and earnings per share. The drivers of profit have been actively managed and all of our businesses delivered strong growth with Annuity sales up 142% to £1.4bn (H1 2012: £0.6bn), LGIM net inflows up 100% to £8.0bn (H1 2012: £4.0bn), growth in scale of Savings assets under administration to £111bn and further growth in US and UK Protection gross premiums.

Operational cash generation increased by 14%, £66m to £537m (H1 2012: £471m).  Each of our business divisions delivered increased cash generation.  UK Housing and Protection increased cash by £34m, including a strong performance from General Insurance, which achieved a combined operating ratio of 81% (H1 2012: 99%). Annuities and Savings increased cash generation by £9m and £7m respectively, reflecting our substantial stock. LGIM's cash generation increased by £9m, as higher scale drove fee revenue growth and its low cost to income ratio of 45% was maintained.

Net cash generation increased by 23% to £500m (H1 2012: £407m), driven by the strong operational cash generation, improved positive new business surplus for annuities, and a permanent improvement to new business strain as a result of the change in the life tax regime for retail protection.

Operating profit increased by 10% to £571m (H1 2012: £518m), reflecting the growth in cash generation.  The strong operating profit and net cash generation growth has enabled us to deliver earnings per share up 13% to 7.82 pence (H1 2012: 6.93 pence) and a higher return on equity of 16.8% (H1 2012: 15.8%)

 

BUSINESS HIGHLIGHTS - ACCELERATING GROWTH

Legal & General continues to deliver across its five growth areas: LGIM international expansion, Retirement Solutions, Digital Solutions, Protection and Direct Investments, through strong organic growth and selective acquisitions.

LGIM gross inflows were up 66% to £24.9bn and net flows were up 100% to £8.0bn.  International expansion continues with net inflows from international clients of £7.5bn (H1 2012: £2.4bn) and international assets under management are now £52bn, up 21% on FY 2012. In July, LGIM Hong Kong gained regulatory approval to market across the region.

In annuities we wrote the largest longevity insurance contract in the UK to date at £3.2bn of associated liabilities, completed our first international annuity transaction with New Ireland Assurance, and wrote £0.7bn (H1 2012: £0.1bn) of bulk annuity premiums in H1 2013. Strong growth continued in individual annuities with premiums up 44% to £0.7bn (H1 2012: £0.5bn), benefiting from the 116% growth in enhanced annuity premiums.

Protection premiums continued to grow, with gross premiums up 3% in UK Protection, and 10% in General Insurance and US Protection.  Pricing and underwriting discipline and benign weather conditions supported an improved combined operating ratio of 81% (H1 2012: 99%) in General Insurance. Group Protection benefited from synergies with our Workplace Savings auto-enrolment proposition with Group life sales increasing by 44%. 

Savings completed the acquisition of Cofunds, the largest UK investment platform, and now has assets under administration of £111bn.  We have already delivered annualised cost savings of over £3m in Cofunds, and remain on track to deliver our target cost savings of £11m pa by 2015.  Our growth businesses (Platforms, unit trusts, workplace pensions and SIPPS) delivered net inflows of £2.3bn (H1 2012: £1.3bn).

In 2013 we acquired a 46.5% stake in the house builder CALA Group. Together with our substantial land bank, CALA will give us the capability to develop assets with attractive returns for shareholders. We also increased the level of direct investments in our annuity fund by more than 80%, to a total of £1.7bn.

INTERIM dividend increased by 22% to 2.40 pence per shaRe

The Board's confidence in the strength of Legal & General's financial performance underpins the decision to increase the interim dividend by 22% to 2.40p (H1 2012: 1.96p) per share at a cost of £142m (H1 2012: £116m).

 

STRATEGIC MOMENTUM

Growth in earnings will be delivered through continued strong organic growth, and a selective, disciplined approach to acquisitions across the framework of our five key growth themes.

The goal of the new organisational structure (effective from 1 July 2013) is to accelerate development across the five themes. The integrated protection and savings business, Legal & General Assurance Society (LGAS), will build on leading digital platforms capability (Cofunds, Workplace, Protection and General Insurance), increase cross-sales and deliver cost synergies.  LGIM will manage the retail unit trust business with a clear goal of significantly increasing market share.  The Annuities division and LGIM will work alongside each other to provide a comprehensive range of retirement solutions across Legal & General's c2,700 defined benefit clients.

There is clear momentum in LGIM's international expansion and rising yields will increase demand for retirement solutions.  Legal & General's bulk annuities, longevity insurance and market-leading LDI solutions are well placed to benefit.  We are actively pursuing a number of opportunities not only in the UK, but also in Europe and North America.  In the Individual Annuity market, we expect growth of at least 8% each year until 2020 and will continue to expand our share of the enhanced annuities market.

Auto-enrolment has been a success with over 90% of joiners staying enrolled, indicating the start of a shift to a more self-reliant culture.  Welfare reform in the UK is proceeding quickly and this increases the need for employers and individuals to consider greater use of protection cover, particularly for those with limited savings funds.

Infrastructure is moving up the policy agenda and our substantial sources of long term funding enable us to increase our direct investment and to play a major role in supporting economic and social development.

Outlook

We expect key trends in H1 of growth in LGIM's internationalisation and higher demand for LGIM's and Annuities' retirement solutions to remain strong drivers of near term growth in scale and operating profit.  This will be supported by a strong focus on operational efficiency and an effective investment strategy.

 

LGIM - We have a healthy pipeline of international new business and plans to expand our distribution capabilities in Europe, US and now Asia.  In the UK our de-risking proposition presents significant revenue opportunities from our maturing defined benefit pension book, as we look to maximise asset retention by offering clients innovative solutions.  While there may be some equity outflows, we anticipate offset from higher inflows into LDI and annuity assets.

 

We expect the impact of transparent charging from the implementation of the Retail Distribution Review (RDR) to continue to drive demand for our low cost retail passive funds and aim to become a major player in this segment.

 

Individual Annuities - The pipeline for standard and enhanced individual annuities remains strong. We believe the new ABI Code of Conduct for Retirement Choices, launched in March 2013, and the FCA's thematic review into annuities will encourage customers to use open market options.  We expect to continue to source the majority of flows from the open market, having gained 79% of new premiums in H1 from external pension providers.

 

Bulk Annuities -The quote pipeline for longevity and bulk annuities remains strong, although the timing of volumes is inherently uneven.  We are developing interest for Legal & General's annuity solutions outside the UK, notably in the Netherlands, Ireland, Canada and the US. The momentum from H1 has continued, with over £0.5bn of bulk and individual annuity premiums written in July. The acquisition of Lucida will add a further £1.4bn of annuity premiums.

 

Retail Protection - Application premiums are now running above the level of a year earlier.  Our mortgage network and leading presence with banks and building societies positions us well to benefit from growing levels of mortgage activity.

 

Group Protection - We have delivered an online quote tool which will support continuing growth in group life alongside further stages of auto enrolment.  High levels of quote activity in H1 have provided a strong pipeline for H2.

 

Savings - Cofunds, as an early mover to clean "nil rebate" share classes, is well placed ahead of the implementation of PS13/1 which bans rebates from fund managers on new business after 1 April 2014.  We are on track to deliver further synergies in 2013 as a result of the Cofunds acquisition.  Workplace business will continue to grow as schemes already secured are transferred to the platform. We transferred £0.5bn of assets from existing schemes to the platform in H1 2013 and expect a further £0.1bn in H2 2013, along with a potential 297,000 employees to auto enrol.

 

Following the implementation of the Retail Distribution Review, the market remains in a transition phase. However, adviser activity is increasing as processes become embedded and we expect a gradual recovery across our building society partners in H2 2013 and beyond.

 

US Protection - Application levels are up on this time last year and we remain on track to deliver the next phase of our US capital efficiency programme by the end of the year. This will release the excess capital on 2013 new business that arises from the US XXX/AXXX reserving regime.

 

Investment MANAGEMENT.

 

Financial highlights	H1 2013	H1 2012
£m
Total revenue	246	219
Total costs	(111)	(100)
Operating profit	135	119
Net cash generation	106	97
Cost:income ratio (%)	45	46
Gross inflows (£bn)	24.9	15.0
International net inflows (£bn)	7.5	2.4
UK net inflows (£bn)	0.5	1.6
Total net inflows (£bn)	8.0	4.0
	H1 2013	FY 2012
Closing assets under management (£bn)	433	406
of which International	52	43

 

benefiting from diversification

                                                                                 

Operating profit of £135m increased 13% (H1 2012: £119m).  This reflects growth in revenue as a result of higher assets under management (AUM) and a continuing low cost to income ratio of 45%.  Total revenue was up 12% to £246m (H1 2012: £219m), while total costs increased at the marginally lower level of 11% to £111m (H1 2012: £100m). Total costs include investment in infrastructure and resources to enable further geographic and product expansion.

 

LGIM achieved net inflows of £8.0bn, double H1 2012, and gross inflows up 66% to £24.9bn (H1 2012: £15.0bn).  Record net inflows of £7.5bn were received from international clients and in the UK LGIM achieved net inflows of £0.5bn. 

 

As the UK defined benefit market matures, LGIM continues to support pension schemes looking to de-risk. LGIM has benefited from clients transitioning towards buyout and gained strong gross inflows of £9bn into active fixed income and liability driven investment (LDI) solutions. LGIM is now the largest manager of LDI in the UK.

 

UK defined contribution (DC) pension AUM increased 13% to £28.7bn (FY 2012: £25.4bn). LGIM continues to invest in its DC proposition to ensure it is further established as a market leader in delivering innovative DC solutions. LGIM continues to develop closer synergies with the Workplace Savings business, to provide the capabilities required to increase share of the DC market. Further product launches are planned for H2 2013 to extend the range of pooled funds available to members of DC pension schemes.

 

International AUM grew by 21% to £52bn (FY 2012: £43bn) with inflows from clients domiciled in each of the key targeted regions. In July, LGIM launched its business in the Asia Pacific region.  The business, headquartered in Hong Kong, will provide index and fixed income solutions to large institutional clients across the region.

 

In the US, AUM has increased to £22bn (FY 2012: £20bn) with LGIM's active fixed income and LDI proposition continuing to attract interest from clients and consultants.  During H1 2013, LGIM America (LGIMA) added a further eight external new clients and now has 47 clients (FY 2012: 39 clients).

 

LGIM continues to expand its footprint in the Gulf and Europe, adding new clients whilst also continuing to leverage existing relationships by offering an innovative range of passive capabilities as well as active capabilities such as fixed income and property. In Europe, LGIM gained gross inflows of £4.7bn, evidencing the success of a strategy that is targeting the largest investment pools in the region.

 

INDEX AND ACTIVE CAPABILITIES

Asset movements	Index	LDI	Active Fixed interest	Active Equities	Property & other	Total
£bn
AUM (at 1 January 2013)	243.2	64.0	82.2	7.7	8.9	406
Gross inflows	16.0	5.7	3.1	-	0.1	24.9
Gross outflows	(13.8)	(1.7)	(1.1)	(0.3)	-	(16.9)
Net flows	2.2	4.0	2.0	(0.3)	0.1	8.0
Market and other movements	16.7	2.9	(1.3)	0.3	0.4	19.0
AUM (at 30 June 2013)	262.1	70.9	82.9	7.7	9.4	433.0

 

Index assets under management increased 8%, taking AUM to £262.1bn. Index tracking remains the primary constituent of total assets, accounting for over 60% at the end of June 2013. Index strategies remain integral to LGIM's international diversification strategy, building presence in Europe, the Gulf and now Asia.  In the UK, index funds are key components of LGIM's growing range of multi-asset funds. LGIM continues to expand its range of products and services in both the UK and overseas.

 

LGIM's market-leading LDI capability continues to grow with AUM increasing 11% to £70.9bn, reflecting record gross inflows of £5.7bn, up 73% (H1 2012: £3.3bn). LGIM's expertise and scale means it is well positioned to benefit from rising bond yields which have made market conditions more conducive to de-risking, as clients look to lock in at preferential rates, compared to the historically low rates of recent years.

 

Active Fixed Income AUM increased to £82.9bn (FY 2012: £82.2bn). LGIM's track record of strong performance across its range of funds continues, with 84% of funds outperforming their benchmarks over one year and 76% over three and five years.

 

LGIM has commenced implementing strategic changes to the Active Equity proposition. Whilst retaining and re-enforcing areas of strong capability and historical performance, LGIM is re-directing other resources towards funds designed for the DC and other target markets.

 

Legal & General Property (LGP) remains the third largest institutional real estate manager in the UK with £9.2bn assets under management. In H1, LGP was selected by the National Employment Savings Trust (NEST) to run two real estate mandates, representing its first direct investment into commercial property. As a result, LGP is well placed to add value through property asset investment to UK retirement solutions and our annuity business.

 

ANNUITIES.

Financial highlights	H1 2013	H1 2012
£m
Operational cash generation	130	121
New business surplus	17	1
Net cash generation	147	122
Experience variances, assumption changes, tax and other variances	4	17
Operating profit	151	139
Individual annuity single premiums (£bn)	0.7	0.5
Bulk annuity single premiums (£bn)	0.7	0.1
Total annuity single premiums (£bn)	1.4	0.6
Annuities new business EEV margin (%)	8.4	8.5
	H1 2013	FY 2012
Annuities assets under management (£bn)	32	32

 

 

 

STRONG DEMAND FOR Legal & General'S expert RETIREMENT SOLUTIONS

 

Operational cash generation grew by 7% to £130m (H1 2012: £121m), reflecting the growth in the scale of the business. The Annuities division gained £1.4bn of new annuity premiums and now provides income to 725,000 pensioners (H1 2012: 675,000). Net cash generation of £147m (H1 2012: £122m) includes a higher new business surplus of £17m (H1 2012: £1m), reflecting our ability to source attractively priced assets to back our new business. L&G Capital and LGIM work together to provide market leading asset portfolio strategies and effective execution to achieve the long term objectives of liability matching and credit risk management.  Strategies are continually refined as market conditions evolve.

 

In the Bulk Annuity market, we wrote 45 policies worth £0.7bn (H1 2012: 28 policies worth £0.1bn), including our first international transaction with New Ireland Assurance covering €136m of annuity liabilities.  We continue to pursue opportunities to leverage our bulk annuity expertise in appropriate non-UK markets. In February 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 Hannover Re.

 

Individual Annuities achieved record H1 sales, up 44% to £0.7bn (H1 2012: £0.5bn). We have seen a growth in the number of annuitants choosing our standard and enhanced annuity products and a 30% increase in average pension pot sizes.  Our focus on enhanced annuities as a growth area continues with premiums more than doubling to £123m (H1 2012: £57m).

 

In July, after the period end, we completed over £0.5bn of annuity premiums. The acquisition of Lucida, a closed UK annuity buy-out company, will add a further £1.4bn of annuity premiums and further strengthen our Annuity business. The Lucida transaction exceeds our target return on economic capital and represents 54% of the embedded value of Lucida, after allowing for capital and reserve releases. 

 

Customers are increasingly looking to shop around for the best available annuity and we are ideally placed for this shift, offering customers competitive pricing of standard and enhanced annuities through our diversified IFA, direct and tied partnership distribution channels.  Sales of external business increased to 79% of total premiums (H1 2012: 73%). 

 

We continue to maintain our pricing discipline, writing business with the primary aim of achieving at least our target return on economic capital. On the EEV basis, the margin was broadly in line with the prior year at 8.4% (H1 2012: 8.5%).

 

Assets under management of £32bn were in line with FY 2012, reflecting growing sales, but offset by lower market values on fixed income bonds due to higher interest rates. Annuity assets and liabilities are well matched and therefore the impact of rising interest rates has little impact on the profitability of annuities, as assets move in line with the liabilities.

 

HOUSING and PROTECTION.

 

Financial highlights	H1 2013	H1 2012
£m
Operational cash generation	149	115
New business strain	(23)	(33)
Net cash generation	126	82
Experience variances, assumption changes, tax and other variances	42	68
Operating profit	168	150
UK Protection new business annual premiums	105	109
UK Protection new business EEV margin (%)	6.7	10.8
Protection gross premiums	689	672
General Insurance gross premiums	183	166
Total gross premiums	872	838

 

market leading scale and continuing profit growth

 

Operational cash generation increased by 30% to £149m(H1 2012: £115m). Gross premiums continued to grow, up 4% on H1 2012, and General Insurance benefited from continued pricing and underwriting discipline and more benign weather conditions, delivering a combined operating ratio of 81% (H1 2012: 99%).

 

New business strain reduced to £23m (H1 2012: £33m), reflecting a change in tax rules for retail protection, partially offset by pricing activity.  As a result, net cash generation increased 54% to £126m (H1 2012: £82m).  Operating profit increased by 12% to £168m (H1 2012: £150m) reflecting the excellent performance in the General Insurance business.

 

Group Protection's high quality proposition achieved sales growth of 8% to £40m (H1 2012: £37m). Group life sales have grown 44% benefiting from large schemes offering death in service benefits to employees when they auto enrol in company pension schemes.

 

Retail Protection sales were down 10% to £65m (H1 2012: £72m) as policies were brought forward by customers into Q4 2012 to secure better rates ahead of gender neutral pricing. As a result sales in Q1 2013 were 25% below Q1 2012.  In Q2 2013 sales were up 6% on Q2 2012 as the market returned to more normal levels. Throughout, we have continued to be the leading provider in the total market and to Independent Financial Advisers (IFAs).  We also benefit from being the sole provider of Retail Protection to building society partners covering 87% of the sector, and to the appointed representatives of the Legal & General Network.  The Legal & General Network facilitates 1 in 7 of all UK mortgages, with a 27% share of the intermediated mortgage market (FY 2012: 25%).  The Network facilitated lending of £11bn in H1 2013 up from £9bn in H1 2012. 

 

The UK Protection new business EEV margin of 6.7% primarily reflects lower Q1 sales in Retail Protection and a degree of pricing volatility until the market adjusted.  In Q2, our Retail Protection sales have returned to more normal levels, and we expect the margin in H2 to improve back to long term average levels, although below the exceptional levels of 2012.

 

General Insurance gross premiums increased by 10% to £183m (H1 2012: £166m) benefiting from continued growth from our broker accounts and from direct sales, where we are now the number one home insurer in direct online sales.

 

Sales from Legal & General Netherlands (LGN) and Legal & General France (LGF) were £51m (H1 2012: £49m) and operating profit was £20m (H1 2012: £17m).  Although the Netherlands has a challenging regulatory regime, we have attained a market share of around 15% in Protection.  We are now leveraging our existing Group Protection relationships with major UK employee benefit consultants who also operate in France.  Operational cash generation, the dividends paid from LGN and LGF to the Group, was £1m (H1 2012: £1m), as dividends are primarily paid in Q4.

 

Savings.

 

Financial highlights	H1 2013	H1 2012
£m
Operational cash	95	88
New business strain	(31)	(32)
Net cash generation	64	56
Experience variances, assumption changes, tax and other variances	(2)	16
Operating profit	62	72
Growth business net flows (£bn)	2.3	1.3
Mature business net flows (£bn)	(2.2)	(1.4)
Net inflows (£bn)	0.1	(0.1)
New business APE	734	620
New business strain % PVNBP1	1.8	2.4
	H1 2013	FY 2012
Assets under administration (£bn)2	111	70
1. Present Value of New Business Premiums for UK Insured Savings business.
2. H1 2013 assets under administration include £39bn of additional assets as part of the acquisition of Cofunds in May 2013.

 

fURTHER PROGRESS ON ASSET GATHERING STRATEGY

 

Operational cash generation is up 8% to £95m, (H1 2012: £88m).  New business was again written more efficiently, as our digitally enabled Workplace Savings platform helped deliver lower unit costs, resulting in new business strain of £31m (H1 2012: £32m) and net cash generation up 14% to £64m (H1 2012: £56m). 

 

Operating profit was £62m (H1 2012: £72m). The H1 2013 operating profit benefited from the increase in net cash generation, offset by a reduction in tax synergies on the Insured Savings business. 

 

Savings increased assets under administration (AUA) to £111bn, reflecting positive market movements and the acquisition of Cofunds in May, which contributed £39bn to this total.  Savings is executing against the asset gathering strategy outlined at the Savings investor presentation on 23 May.  In the Growth business, net inflows were £2.3bn (H1 2012: £1.3bn), exceeding net outflows on the Mature business of £2.2bn (H1 2012: £1.4bn), which reflect maturities from with-profit endowment policies sold in the 1980s, insured pensions, insured bonds and structured products.

 

Asset movements	Platforms1	Workplace	Suffolk Life	Unit Trusts	Total Growth	Mature
£bn
AUA (at 1 Jan 2013)	7.2	6.0	5.1	11.2	29.5	40.6
Gross inflows	0.6	1.0	0.5	1.7	3.8	0.8
Gross outflows	(0.4)	(0.3)	(0.2)	(1.5)	(2.4)	(3.0)
Cofunds net flows	0.9	-	-	-	0.9	-
Net flows	1.1	0.7	0.3	0.2	2.3	(2.2)
Acquisition of Cofunds	39.1	-	-	-	39.1	-
Market movements	(1.4)	0.6	0.3	0.5	-	1.5
AUA (at 30 Jun 2013)	46.0	7.3	5.7	11.9	70.9	39.9
1. Platforms include Legal & General's Investor Portfolio Services (IPS) platform and the Cofunds platform.  Platforms exclude £8bn of Suffolk Life, Unit Trust and Mature assets held on the Cofunds platform.

 

PLATFORMS - digital scale with the No 1 uk platform by assets

 

The investment platform market is predicted to double in size from 2012 to 2017. The acquisition of Cofunds, the UK's largest investment platform, provides Legal & General with a business that will be a major beneficiary of this projected market growth.  The integration of Cofunds into Legal & General has begun and annualised cost synergies of over £3m have already been achieved.   We remain on track to deliver cost synergies of £11m pa from 2015 at a cost of £17m.

 

Cofunds achieved net inflows of £3.5bn (net inflows of £0.9bn since the acquisition on 23 May 2013), and as a result Cofunds AUA increased to £53.7bn (FY 2012: £47.6bn).

 

Our partnerships with Nationwide, Yorkshire, Leeds, Principality and a number of other building societies gives us sole tie distribution for our Savings products with 82% of building society customers in the UK.  As guided in the FY 2012 results announcement, a planned transition phase with our building society partners following the implementation of the Retail Distribution Review (RDR) has had an effect on activity. Our IPS platform, used by our building society partners, had net inflows of £0.2bn (H1 2012: £0.7bn) and AUA of £9.0bn (FY 2012: £8.6bn) of combined mutual funds and insured assets. 

 

UNIT TRUSTS - strong growth in passive funds

 

Sales of our low cost passive funds increased by 65% to £1.2bn.  As stated previously, we expect growth in retail passive funds of between 10% and 20% per annum over the next five years, due to greater transparency of charging following implementation of the RDR. Total gross sales of unit trusts, including our active funds, grew to £1.7bn (H1 2012: £1.2bn), contributing to growth in AUA to £11.9bn (FY 2012: £11.2bn). Following the changes to our organisational structure effective from 1 July, management of business, including Unit trusts and structured products, has moved to LGIM.  This will enable our retail investment customers to benefit fully from LGIM's scale and low cost manufacturing. 

 

pensions platforms - WORKPLACE and suffolk life

 

Workplace Savings delivered sales up 94% to £329m (H1 2012: £170m) and net inflows of £0.7bn (H1 2012: £0.7bn).  Transfers of assets from larger schemes occurred during 2012.  The workplace platform now has AUA of £7.3bn (FY 2012: £6.0bn) and over 605,000 customers (FY 2012: 381,000) with a further 38,000 existing scheme members to transfer and 297,000 employees to auto enrol from schemes already won.  Current opt out rates of less than 10% are well below our pricing assumptions. Following the implementation of auto enrolment for the large employers in 2012 and H1 2013, we expect new business levels will return to more normal levels. However, we continue to attract new employers to our scalable and highly efficient workplace platform, with 72 new schemes won in H1 2013, with an additional 37,000 existing members and a potential 90,000 auto-enrolees.

 

Our SIPP business, Suffolk Life, delivered net inflows of £0.3bn (H1 2012: £0.2bn) and sales up 25% to £50m APE.  The business continues to grow organically through demand for its bespoke SIPP proposition and from backbook acquisitions as we start to see consolidation in the SIPP market. As a result the AUA of Suffolk Life increased by 11% compared to FY 2012.

 

US Protection.

 

Financial highlights	H1 2013	H1 2012
$m
Operating profit	81	76
Operational cash generation	66	60
Gross premium income	503	456
New business APE	70	66
New business EEV margin (%)	10.0	10.9

 

further growth in premiums and profits

 

Legal & General America (LGA) has delivered operating profit, gross premium and new business sales growth in each of the last four years.  In this time the business has moved to being a top five provider of ordinary life insurance from outside the top ten. LGA now has the third largest market share in the US as measured by ordinary life insurance issued ,and is the largest for the key distribution channel of broker general agents, by face amount.

 

In H1 2013 the LGA business continued to grow. Sales increased by 6% to $70m (H1 2012: $66m), as LGA delivered on the strategy of extending distribution reach through key brokerage agents in the US market.  The rate of LGA's sales growth in H1 is double that reported for the US Term Assurance market (as reported in Q1 2013).

 

Higher sales resulted in an increase in gross premiums by 10% to $503m (H1 2012: $456m) and a growth in number of policies to over 1 million (H1 2012: 930,000).  Operating profit increased to $81m (H1 2012: $76m) reflecting the increase in gross premiums and continuing cost reductions, where new business submitted unit costs have reduced by 4% as premiums have increased and LGA has continued to make operational efficiencies in underwriting processes.  In the two years from 2010 to 2012, LGA unit costs reduced by 30% (CPI adjusted).  A recent benchmarking study of 15 life companies indicated that LGA was ranked the lowest cost provider.

 

Operational cash generation has increased by 10% to $66m (H1 2012: $60m). This represents the dividends paid to the Group.  New business margin reduced marginally to 10.0% (H1 2012: 10.9%) reflecting a higher risk discount rate as interest rates increased in the US.

 

Legal & General Assurance Society has been granted certified reinsurer status by the New York Department of Financial Services, the regulator for New York State.  LGA provided temporary excess capital of $0.1bn on H1 2013 new business that arises from the US XXX/AXXX reserving regime which we expect to release in H2 as part of our rolling programme of capital releases.

 

L&G capital.

 

L&G Capital as a division provides four key functions: Direct Investments; implementing the investment strategy across the balance sheet; and managing the Group's Shareholder Funds investments, alongside managing the Group's debt and liquidity.

 

DIRECT INVESTMENTS growing rapidly

 

As banks retrench, a wide range of attractive direct investment opportunities have arisen for Legal & General, from both a returns and synergy perspective. Direct Investments, where bilateral contracts are written, avoid exchange trading and associated frictional costs and are a natural fit for Legal & General, given our sources of long term funding and desire to invest to meet social purpose. Our focus is on infrastructure, commercial lending, property (commercial and residential) and asset finance. We have earmarked substantial capital for these sectors across the Group. Our Direct Investment portfolio has grown as we have built capability and expertise, including structuring capability. In H1 2013 we increased our direct investments in LGPL, the main subsidiary for the UK's annuity business, by more than 80% to a total of £1.7bn. In the shareholder funds we have £0.5bn of direct investment and expect to increase exposures in this fund as well as in the US and French asset portfolios.  

 

Transactions in H1 2013 included the acquisition of a 46.5% shareholding in the house builder CALA Group. Together with our substantial land bank, CALA will give us the capability to develop assets with attractive returns for shareholders. We have a £1.2bn property and commercial lending portfolio in our annuity fund, all with investment grade tenants and long leases which provide well matched cash flow with the security of high quality properties. These include a new Tesco distribution centre and a prime office block in the City of London.  Our commercial lending capability has executed its first social housing lending deal and our direct investment into UK infrastructure has increased with investment into the University of Hertfordshire and our first alternative energy investment, providing debt financing to a solar farm in the South East of England. Within our bond portfolio we hold £1.9bn relating to infrastructure and social housing, meaning we now hold over £4bn in infrastructure and direct investments.

 

'ONE FIRM' STRATEGY AND IMPLEMENTATION

 

We aim to ensure our portfolio of assets is well matched to the liabilities, and derivatives are used where this is not possible. We actively manage the portfolios as market conditions change, as evidenced by the significant reductions in subordinated bank debt in LGPL since 2008 and the minimal peripheral sovereign debt exposure.  We operate the strategy within a strong group control framework, with a core responsibility for assessing economic outlook and risks of unexpected losses, alongside ensuring that the regulatory requirements are met. 

 

In LGPL, we maintain a provision of £1.7bn (FY 2012: £1.7bn) to provide for the risk of credit default. The provisioning for default in LGPL is driven by the credit quality of the assets.  In H1 2013, the UK Government was downgraded to Aa1/AA+ by Moody's/Fitch, as a result of which we created an explicit provision against UK Gilts.

 

 

Asset portfolio	H1 2013		FY 2012
£bn	LGPL1	Total	LGPL1	Total
Bonds:	28.6	34.6	29.2	34.9
Sovereigns	4.3	6.6	4.5	6.3
Banks	2.2	3.0	2.3	3.2
Other bonds	22.1	25.0	22.4	25.4
Property	0.9	1.1	0.7	0.8
Equities	-	1.5	-	1.4
Derivatives	2.1	2.3	2.9	3.1
Cash and cash equivalents	0.6	2.2	0.5	2.7
Total Asset Portfolio	32.2	41.7	33.3	42.9
1. LGPL is the main operating subsidiary for the UK's annuity business.

 

Investment variance across the Group was £42m (H1 2012: £5m) as a result of strong equity returns in Shareholder Funds and a positive impact from the increase in exposure to direct investments in LGPL. This was partially offset by a small negative impact from increasing interest rates.

 

SHAREHOLDER FUND INVESTMENTS

 

Financial highlights	H1 2013	H1 2012
£m
Operating profit	86	81
Operational cash generation	68	62
	H1 2013	FY 2012
L&G Capital assets (£bn)	4.7	4.7

 

L&G Capital manage £4.7bn of the Group's shareholder funds. The investment strategy for these funds will increasingly focus on ensuring that, whilst meeting the solvency and liquidity requirements of the Group, there is a pipeline of assets that can be used to meet the business objectives of the Group including direct investments and seed capital for LGIM.

 

During H1 2013 we utilised £131m of L&G Capital assets to acquire Cofunds, the UK's largest investment platform and paid the 2012 final dividend of £337m.  This was offset by the strong cash generation in the year, resulting in assets of £4.7bn (FY 2012: £4.7bn).

 

The smoothed investment return on the investment portfolio is calculated asset class by asset class and equates to an annualised average smoothed investment return of 3.9% (H1 2012: 3.8%) on the average balance of invested assets of £4.6bn (H1 2012: £4.4bn).

 

solid DEBT AND LIQUIDITY MANAGEMENT

 

Financial highlights	H1 2013	H1 2012
£m
Group debt costs	(64)	(63)
Operational cash generation	(49)	(47)
	H1 2013	FY 2012
Closing outstanding core borrowings (£bn)	2.4	2.4
Closing outstanding short term operational borrowings (£bn)	0.4	0.3
Total outstanding borrowings	2.8	2.7

 

Legal & General has a strong liquidity position. The principal balance sheet contains in excess of £5bn in Gilts and cash versus £2.8bn of Group borrowings, including £2.4bn of long term financing and £0.4bn of short term borrowings. The earliest bond call or maturity date is 2015.  The rating agencies continue to have a favourable view of Legal & General and S&P, after their methodology change, reaffirmed our AA- rating; in particular the Group's 'very strong' capital adequacy and 'exceptional' liquidity position.  We are maintaining a strong liquidity position ahead of the expected implementation of central clearing regulation which will affect the Annuity portfolio; however given the level of liquidity is comfortably above expected requirements, we have the ability to use our liquidity position to take advantage of favourable direct investment and other market opportunities.

 

Group debt costs of £64m (H1 2012: £63m) reflect the average cost of debt of 4.7% per annum (H1 2012: 4.8%) on average nominal value of debt balances of £2.7bn (H1 2012: £2.6bn).

 

cash generation.

 

The sources of our cash generation are transparent and the table below highlights the cash generation by segment. Operational cash generation increased by 14%, reflecting increased cash generation across each of our business divisions.  This includes the full year dividend of $66m from LGA which was received in Q1 2013.

 

		H1 2013				H1 2012
£m		Op cash	Strain	Net cash		Op cash	Strain	Net cash
Annuities		130	17	147		121	1	122
UK Protection		126	(23)	103		107	(33)	74
Insured Savings		55	(31)	24		53	(32)	21
Sub total		311	(37)	274		281	(64)	217
With-profits		29		29		26		26
US Protection		43		43		38		38
European dividends		1		1		1		1
Sub total		384	(37)	347		346	(64)	309
Savings Investments		11		11		9		9
GI and Other risk		22		22		7		7
Investment Mgt		106		106		97		97
L&G Capital		68		68		62		62
Group debt and other costs		(54)		(54)		(50)		(50)
Total cash generation		537	(37)	500		471	(64)	407

 

The increase in annuity new business surplus to £17m (H1 2012: £1m) reflects our capability to source attractively priced assets to match our new business liabilities.

 

A change of tax rules for new retail protection business at the end of 2012 has accelerated the emergence of cash and so reduced new business strain. This is a permanent effect to new business strain and in isolation we expect the annualised impact to be c£50m (c£25m for H1 2013). Under the previous tax regime acquisition expense tax relief emerged evenly over the first seven years of each contract. Since this will no longer be the case there will be a reduction in operational cash generation by an incremental c£9m in each of the next six years, starting in 2014, from this change.

 

CLEAR VISIBILITY between cash generation and earnings

 

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

 

£m	Op cash	Strain	Net cash	Variances and other	Profit after tax	Tax	Profit before tax
Annuities	130	17	147	(31)	116	35	151
Housing and Protection	149	(23)	126	3	129	39	168
Investment Mgt	106	-	106	-	106	29	135
Savings	95	(31)	64	(17)	47	15	62
US Protection	43	-	43	(8)	35	18	53
L&G Capital	68	-	68	-	68	18	86
	591	(37)	554	(53)	501	154	655
Group debt and other costs	(54)	-	(54)	(10)	(64)	(20)	(84)
Operating profit	537	(37)	500	(63)	437	134	571
Investment and other variances	-	-	-	27	27	(6)	21
Total	537	(37)	500	(36)	464	128	592
Per share	9.14		8.51		7.82
Dividend per share			2.40		2.40

 

balance sheet.

 

Capital resources -Strong Balance Sheet

 

As at 30 June 2013 the Insurance Group's Directive (IGD) surplus was £4.1bn (FY 2012: £4.1bn).

 

The Group's capital resources totalled £7.4bn, covering the capital resources requirement of £3.3bn by 2.26 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 2013 interim dividend of £142m.

 

Capital	H1 2013	FY 2012
£bn
Group capital resources	7.4	7.2
Group capital resources requirement	3.3	3.1
IGD surplus	4.1	4.1
Coverage ratio %	226	234

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

 

Pillar 1 capital requirement	H1 2013	FY 2012
£bn
Annuities	1.2	1.2
Protection	0.7	0.7
Savings	0.1	0.1
With-profits	0.5	0.6
Other subsidiaries	0.5	0.4
Operational group capital resources requirement	3.0	3.0
With-profits insurance capital component (WPICC)1	0.3	0.1
Group capital resources requirement	3.3	3.1

1. The With-profits Insurance Capital Component (WPICC) is an additional capital requirement calculated if the surplus in the with-profits fund on a realistic Peak 2 basis is lower than on a regulatory Peak 1 basis and represents the difference in the surplus between the two bases.  It is calculated on the most onerous risk capital margin stress.

taxation.

GROUP TAX Rates - effective tax rate of 21.6%

Equity holders' effective tax rate	H1 2013	H1 2012
%
Total Effective Tax Rate	21.6	22.5
Annualised rate of UK corporation tax	23.25	24.5

 

In 2013, the Group's effective tax rate remained slightly below the UK corporation tax rate due to a number of differences between the measurement of accounting profit and taxable profits.

 

Deferred tax asset utilisation

 

In the UK, the Group has a deferred tax asset of £138m (FY 2012: £316m), including £97m in respect of trading losses (FY 2012: £127m).The utilisation of trading losses is partly reflected within the Protection and Annuities business, where it has contributed £38m in 2013 (H1 2012: £30m; FY 2012: £72m) to net cash generation.

 

Supplementary EEV disclosure

EEV highlights	H1 2013	FY 2012
Equity per share including LGIM (pence)	182	173
Equity per share (pence)	158	151

 

Analysis of EEV results	H1 2013	H1 2012
£m
Contribution from new business	257	167
Expected return from in-force business	211	223
Experience variances and assumption changes	29	(38)
Development costs	(18)	(9)
Contribution from shareholder net worth	71	72
EEV operating profit on covered business	550	415
Business reported on an IFRS basis	90	41
EEV operating profit	640	456
Economic variances	264	(140)
Gains attributable to non-controlling interests	5	1
EEV profit before tax	909	317
Tax and other	(126)	(2)
EEV profit after tax	783	315

 

EEV PER SHARE

 

The Group delivered £783m of EEV profit after tax, which after payment of the 2012 final dividend of £337m and foreign exchange, pension deficit and other adjustments of £(17)m, increased EEV shareholders' equity to £9,329m (FY 2012: £8,900m), equivalent to 158 pence per share (FY 2012: 151 pence per share). Including LGIM's external funds in the calculation increases the EEV per share to 182 pence (FY 2012: 173 pence).

 

New business contribution

 

Contribution from new business increased to £257m (H1 2012: £167m). The increase reflects the strong increase in the contribution from our Annuities and Longevity Insurance businesses, where sales increased on a PVNBP basis to £2.1bn (H1 2012: £0.6bn).

Worldwide EEV new business margin increased to 4.4% (H1 2012: 4.2%) primarily due to the higher mix of annuity business.

 

EEV operating profit

 

EEV operating profit increased by 40% to £640m (H1 2012: £456m), as the Group benefited from its growth strategy and higher sales. Experience variances and assumption changes were positive, £29m in H1 2013, and higher than the £(38)m in H1 2012 with positive claims and persistency experience in Retail Protection partially offset by higher than expected lapses in US Protection.  The operating profit also benefited from strong results in Investment Management and General Insurance which are largely reported on an IFRS basis within the EEV operating profit.

 

economic VARIANCES

 

Positive economic variances of £264m (H1 2012: £(140)m) arose from a number of factors including higher equity market returns, continued favourable default experience, actions to improve the yield on annuity assets, and a lower risk margin. This is offset by a higher risk free rate that increased the risk discount rate.

 

value in-force

 

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

 

Reconciliation of UK long term business VIF	Discounted	Undiscounted1
£bn
Opening VIF at 1 January 2013	4.4	8.8
Contribution from new business	0.2	0.4
Unwind of discount rate	0.1	n/a
Expected release from non profit and with-profits businesses2	(0.3)	(0.3)
Experience variances / assumption changes	-	0.1
Investment variance / economic assumption changes	0.1	0.5
Other	0.1	0.1
Closing VIF at 30 June 2013	4.6	9.6

 

1. Management estimates.            

2. Comprises the expected release from non profit business of £311m and with-profits transfer of £29m.

 

The discounted and undiscounted VIF of the UK long term business has grown substantially since 2009. The discounted VIF has increased by 24% from £3.7bn in 2009 to £4.6bn at H1 2013 and the undiscounted VIF has increased by 22% from £7.9bn in 2009 to £9.6bn in H1 2013.

 

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 £0.3bn (H1 2012: £0.2bn), equivalent to 5p per share (H1 2012: 4p per share).

 

The external assets component of LGIM is included at the IFRS net asset value of £0.5bn (H1 2012: £0.4bn), equivalent to 8p per share (H1 2012: 7p per share).

 

Including the external assets component of LGIM on an embedded value basis would increase the contribution of LGIM to the Group embedded value from £0.8bn (13p per share) to £2.2bn (37p per share). In line with the rest of the Group, the embedded value for LGIM excludes any value for future new business.

 

Estimated LGIM discounted cash flow valuation	H1 2013	H1 2013
	p per share	£bn
Look through value of profits on covered business	5	0.3
Net asset value	8	0.5
Current value of LGIM in Group embedded value	13	0.8
LGIM VIF	24	1.4
Alternative discounted value of LGIM future cash flows	37	2.2

 

Including LGIM, this scenario equates to an indicative valuation per share of 182 pence.

 

Indicative valuation including LGIM	H1 2013	H1 2013
	p per share	£bn
EEV as reported	158	9.3
LGIM VIF	24	1.4
Total including LGIM	182	10.7

 

PRINCIPAL RISKS AND UNCERTAINTIES.

 

Legal & General runs a portfolio of risk taking businesses; we accept risk in the normal course of business and aim to deliver sustainable returns on risk based capital to our investors in excess of our cost of capital. We manage the portfolio of risk that we accept to build a sustainable franchise for the interests of all our stakeholders; we do not aim to eliminate that risk. We have an appetite for risks that we understand deeply and are rewarded for, and which are consistent with delivery of our strategic objectives. Risk management is embedded within the business. The Group is exposed to a number of key risk categories

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, our required reserves for future liabilities and the period of retention of products. 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.		The regulatory environment in which the Group operates continues to evolve. In the UK the FSA has transitioned to the Prudential Regulatory Authority and Financial Conduct Authority, with the inherent risk of unintended consequences for the insurance sector as each body develops their regulatory approach. A more aggressive supervision and enforcement regime may also lead to increased capital requirements and increased compliance costs. There also remains uncertainty both to the implementation timescales of Solvency II and the final calibrations that will be used for long term business. Other areas of regulatory change that may impact our business include further regulation of the UK mortgage market and the EU Packaged Retail Investment Products directive.

 

financial market and economic conditions

 

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.		Investment markets in the first half of 2013 have continued to show a strong recovery. Recent economic indicators also reflect an improving outlook for UK growth. There remains, however, potential for shocks to global financial markets emanating from the Euro zone and very low growth in Europe may act as a drag on the UK's economic recovery. There remains potential for future economic shock from a sudden unwinding of the current macro economic policy of low interest rates and quantitative easing. Extreme market shocks may impact our ability to execute hedging strategies that ensure the profile of our asset and liability cash flows is appropriately matched, whilst economic shocks may impact consumer attitudes in the markets in which we operate.

 

INDUSTRY CHANGE

 

The Group may not maximise opportunities from structural and other changes facing the broader financial services sector.   The broader 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 implications for our businesses, or the incorrect execution of change may impact the achievement of our strategic objectives.		Macro trends facing the sector include an ageing population, the retrenchment of banks, welfare reform and changes in the way consumers purchase financial services products. We have clear strategies to respond to these trends. We continue the expansion of our Retirement Solutions business; property lending and sales and leaseback investments, as well as direct investments such as in the CALA Group, enable us to diversify our investment risks in high quality asset classes previously the domain of banks; we continue to provide market leadership with our suite of protection products and our auto enrolment proposition; and our Retail Distribution Review (RDR) proposition alongside our acquisition of Cofunds enables us to engage across the changing distribution landscape.

 

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, whose failure could expose us either to financial loss or short-term operational disruption of our business processes.		Credit spreads have continued to normalise over the first half of 2013, reflecting increased market confidence in the issuers of investment grade bonds. At L&G we continue to experience a very low level of actual defaults. The potential for a major bank default or Sovereign event is still assessed as being a more extreme outcome. Nevertheless, the risk and associated uncertainties remain and we retain provisions to accommodate extreme outcomes from such events. Whilst we carefully select and monitor the financial strength of all our counterparties, an economic shock or significant deterioration in the economic outlook may increase potential for a supplier of business services being unable to meet their obligations to us.

 

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. Regulatory actions 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.		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 differences in their respective business models. To mitigate the risk we actively manage our brand and seek to differentiate our business model from that of our competitors. We also seek to engage with our regulators to support understanding of the risk drivers in the markets that we operate.

 

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 because of regulatory or legislative intervention in the way that products are priced.		We regularly appraise the assumptions underpinning the business that we write using both external and our own mortality data.  Extreme events, however, 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. As illustrated by the implementation of the EU gender neutral pricing legislation, there is potential for legislative intervention in the pricing of insurance products irrespective of risk factors such as age or health.

 

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.		We continue to invest in our systems 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 risk 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	020 3124 2090
Richard King	Head Of Media Relations	020 3124 2095
Michelle Clarke	Tulchan Communications	020 7353 4200
Katharine Wynne	Tulchan Communications	020 7353 4200

 

Notes

 

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

 

A presentation to analysts and fund managers will take place at 9.30 BST 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 DIALING IN FROM	NUMBER YOU SHOULD DIAL
UNITED KINGDOM	0800 368 0649
ALL OTHER LOCATIONS	+ 44 20 3059 8125

 

 

Financial Calendar	Date
Ex dividend date	28 August 2013
Record date	30 August 2013
Payment date of 2013 interim dividend	30 September 2013
Q3 Interim Management Statement 2013	05 November 2013
Preliminary Results 2013	05 March 2014

 

Forward-looking statements

 

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

 

GOING CONCERN statement

 

The Group's business activities, together with the factors likely to affect its future development, performance and position in the current economic climate are set out in this Interim Management Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Group Results. Principal risks are detailed above. In addition, the financial statements include, amongst other things, notes on the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.

 

While the economy has shown signs of improvement in 2013, the general climate still remains uncertain. However, based on the available information on the future, the directors consider that the Group has the plans and resources to manage its business risks successfully as it has a diverse range of businesses and remains financially strong.

 

After making enquiries, the directors have a reasonable expectation that the company and the Group have adequate resources to continue their operations for the foreseeable future. For that reason, they continue to adopt the going concern.

Directors' Responsibility statement

We confirm to the best of our knowledge that:

 

i.    The condensed set of interim financial statements has been prepared in accordance with IAS 34 as adopted by the European Union;

 

ii.    The interim management report includes a fair review of the information required by DTR 4.2.7, namely an indication of important events that have occurred during the first six months of the financial period and their impact on the condensed set of financial statements, as well as a description of the principal risks and uncertainties faced by the company and the undertakings included in the consolidation taken as a whole for the remaining six months of the financial year;

iii.   The interim management report includes, as required by DTR 4.2.8, a fair review of material related party transactions that have taken place in the first six months of the financial period and any material changes in the related party transactions described in the last Annual Report

 

iv.   The European Embedded Value basis Group embedded value  and associated notes have been prepared on the European Embedded Value basis as set out in Note 5.08; and

 

 

The directors of Legal & General Group Plc are listed in the Legal & General Group Plc Annual Report for 31 December 2012, with the exception of Lindsay Tomlinson who joined the company as non-executive director on 1 May 2013, Dame Clara Furse who retired as non-executive director of the company on 1 May 2013, Henry Staunton who retired as non-executive director of the company on 22 May 2013 and Nick Prettejohn who retired as non-executive director of the company on 6 June 2013. A list of current directors is maintained on the Legal & General Group Plc website: legalandgeneralgroup.com.

 

By order of the Board
N. D. Wilson	M. J. Gregory
Group Chief Executive	Group Chief Financial Officer
5 August 2013	5 August 2013