L&G H1 2014 Results Part 1

Legal & General Group Plc Interim Management Report 2014

 

Stock Exchange Release

06 August 2014

 

DIVIDENDS UP 21%, NET CASH UP 13%

 

Financial highlights:

·    NET CASH GENERATION UP 13% TO £567M (H1 2013: £500M)

·    OPERATIONAL CASH GENERATION UP 8% TO £578M (H1 2013: £537M)

·    OPERATING PROFIT UP 11% TO £636M (H1 2013: £571M)

·    PROFIT AFTER TAX UP 9% TO £507M (H1 2013: £466M)

·    EARNINGS PER SHARE UP 9% TO 8.51P (H1 2013: 7.82P)

·    RETURN ON EQUITY 17.6% (H1 2013: 16.8%)

·    INTERIM DIVIDEND UP 21% TO 2.90P PER SHARE (H1 2013: 2.40P)

 

Business highlights:

·    ANNUITY ASSETS UP 20% TO £38.5BN (H1 2013: £32.2BN)

·    RECORD ANNUITY SALES OF £3.5BN (H1 2013: £1.4BN)

·    LGIM AUM UP 7% TO £465.1BN (H1 2013: £433.0BN)

·    LGIM TOTAL ASSETS¹ UP 13% TO £653.7BN (H1 2013: £578.7BN)

·    UK PROTECTION GWP UP 7% TO £743M (H1 2013: £692M)

·    UK PROTECTION SALES UP 17% TO £123M (H1 2013: £105M)

·    SAVINGS AUA UP 17% TO £117.8BN (H1 2013: £100.4BN)

·    LGC NEW DIRECT INVESTMENT OF £1.6BN (H1 2013: £0.9BN)

·    LGA SALES UP 11% TO $78M (H1 2013: $70M)

 

 

1.LGIM total assets includes £465bn (H1 2013: £433bn) of AUM and £189bn (H1 2013: £146bn) of derivative overlay and GIA advisory assets.

 

Nigel Wilson, Group Chief Executive, said:

 "These are strong financial results with dividends once again growing over 20% and a return on equity of 17.6%. We continue to deliver good growth on all other key metrics. We are successfully executing our strategy connecting our five long-term macroeconomic and demographic trends to real business outcomes. Strong business performance across a well-diversified range of insurance, savings and investment markets underpins consistent earnings quality and dividend growth and enables us to respond positively to the ever changing political and regulatory landscape.

 

We were early adopters of institutional 'slow money' and have provided £5bn to drive major investment in housing and infrastructure.  We increasingly use digital technology to power cheaper insurance, savings and investment products for customers: pension auto-enrolment, where we cap charges at 0.5% will ultimately transform welfare provision - Beveridge 2.0. 

 

A growing number of partners from all sectors - CALA Homes, Places for People, English Cities Fund, Shelter, and government - local and central - not only share our thinking, but are working with us to deliver it.

 

We have the scale and the skill to play a major role investing in the fabric of the UK to drive growth and competitiveness.  Our economically and socially useful products address long-term, intergenerational issues for young and old, that go to the heart of improving quality of life for individuals and families, while strategic clarity and operational excellence drive consistent improvement in shareholder returns."

 

 

 

           FINANCIAL SUMMARY

 

Financial highlights	H1 2014	H1 2013	Growth %
£m
Analysis of operating profit
Legal & General Retirement	188	151	25
Legal & General Investment Management	159	152	5
Legal & General Assurance Society	223	213	5
Legal & General Capital	102	86	19
Legal & General America	43	53	(19)
Operating profit from divisions	715	655	9
Group debt costs	(63)	(64)	2
Investment projects and expenses	(16)	(20)	20
Operating profit	636	571	11
Investment and other variances (incl. minority interests)	-	23	n/a
Profit before tax	636	594	7
Operational cash generation	578	537	8
New business strain	(11)	(37)	70
Net cash generation	567	500	13

 

            LEGAL & GENERAL RETIREMENT (LGR)

 

£bn	H1 2014	H1 2013	Growth %
Annuity assets	38.5	32.2	20
Longevity insurance premiums (£m)	167	92	82
Annuity sales	3.5	1.4	147
Annuity net inflows	2.5	0.5	400

 

LEGAL & GENERAL INVESTMENT MANAGEMENT (LGIM)

 

£bn	H1 2014	H1 2013	Growth %
LGIM AUM1	465.1	433.0	7
LGIM total assets	653.7	578.7	13
LGIM International total assets	82.8	61.2	35
LGIM total net flows	10.4	13.4	(22)
LGIM International net flows	5.9	7.6	(22)

 

            LEGAL & GENERAL ASSURANCE SOCIETY (LGAS)

 

£m	H1 2014	H1 2013	Growth %
UK Protection new business annual premiums	123	105	17
UK Protection gross premiums	743	692	7
General Insurance gross premiums	178	183	(3)
Savings AUA (£bn)	117.8	100.4	17
Savings net flows (£bn)	2.6	0.3	n/a

 

            LEGAL & GENERAL CAPITAL (LGC)

 

£bn	H1 2014	H1 2013	Growth %
LGC assets	5.2	4.7	11

 

 

LEGAL & GENERAL AMERICA (LGA)

 

$m	H1 2014	H1 2013	Growth %
LGA new business annual premiums	78	70	11
LGA gross premiums	553	503	10

 

1.     LGIM AUM includes £38.5bn (H1 2013: £32.2bn) managed on behalf of LGR and £43.3bn (H1 2013: £40.7bn) managed on behalf of LGAS Savings.

 

FINANCIAL HIGHLIGHTS - INCREASED MOMENTUM

Legal & General delivered excellent growth in operational and net cash generation, operating profit and earnings per share. The business continues to deliver significant increases in the drivers of our growth, with annuity assets increasing 20% to £38.5bn (H1 2013: £32.2bn), Insurance premiums increasing 9% to £1.5bn (H1 2013: £1.4bn) and Savings assets increasing 17% to £117.8bn (H1 2013: £100.4bn). LGIM further increased its total assets by 13% to £653.7bn (H1 2013: £578.7bn).

Operational cash generation increased by 8% to £578m (H1 2013: £537m). LGR increased cash by £16m, to £146m (H1 2013: £130m) reflecting the increasing stock of annuity assets under administration. LGAS increased cash by 3% to £237m (H1 2013: £231m), including an 11% increase in Protection operational cash. LGIM's cash generation increased 5% to £125m (H1 2013: £119m) reflecting its growing stock of assets, whilst LGC and LGA contributed £82m and £44m, up 21% and 2%, respectively. Group debt costs and other expenses contributed £(56)m (H1 2013: £(54)m) to cash.

Net cash generation increased by 13% to £567m (H1 2013: £500m), driven by the strong operational cash generation, reduced new business strain in LGAS Protection and LGAS Savings, as well as improved positive new business surplus for Annuities.

Operating profit increased by 11% to £636m (H1 2013: £571m), reflecting the strong underlying performance of our divisions.  Profit before tax increased 7% to £636m (H1 2013: £594m). The strong profit and net cash generation growth has enabled us to deliver earnings per share up 9% to 8.51 pence (H1 2013: 7.82 pence) and a higherannualised return on equity of 17.6% (H1 2013: 16.8%).

The Board has confidence in the strength and growth prospects for the business. This underpins the decision to increase the interim dividend by 21% to 2.90 pence (H1 2013: 2.40 pence) per share and is in line with our dividend guidance announced at the 2013 full year results.

 

BUSINESS HIGHLIGHTS - DRIVING GROWTH

The Group continues to execute on its clear and focused strategy based on five key macro trends: ageing populations; globalisation of asset markets; welfare reform; digital lifestyles and retrenching banks, through both organic growth and selective bolt-on acquisitions. Our response to these trends: Retirement Solutions; LGIM international expansion; Protection; Digital Solutions and Direct Investments are continuing to drive growth in our cash and earnings.

LGR more than quadrupled bulk annuity new business premium to £3.1bn (H1 2013: £0.7bn) including the largest ever UK Bulk Annuity contract increasing our stock of annuity assets by 20% to £38.5bn (H1 2013: £32.2bn). Individual Annuity premiums reduced to £0.4bn (H1 2013: £0.7bn) reflecting the impact we expected from the budgetary reforms to the UK pensions market.

LGIM total AUM increased 7% to £465.1bn (H1 2013: £433.0bn), with total assets, including derivative overlay and advisory assets, increasing 13% to £653.7bn (H1 2013: £578.7bn).

Net AUM flows of £(2.0)bn (H1 2013: £7.7bn) included International AUM flows of £4.0bn (H1 2013: £7.5bn) as LGIM continues to expand overseas, with continued growth in LGIM America's LDI and Active Fixed Income products.  As a result International AUM increased by 25% to £65.3bn (H1 2013: £52.4bn).

Total Index net outflows of £(8.4)bn (H1 2013: inflows of £2.7bn) included c£5bn of assets being withdrawn by three large clients in the UK to either be managed in-house or to fund bulk annuity transactions. LGIM's market leading Liability Driven Investment (LDI) proposition delivered net AUM flows of £3.6bn (H1 2013: £4.6bn), increasing LDI AUM to £78.2bn (H1 2013: £70.9bn).

Protection premiums continued to grow, with UK Protection premiums up 7% to £743m (H1 2013: £692m) with strong increases in both our highly automated Retail Protection business, with premiums up 6% to £514m (H1 2013: £484m) and a 10% increase in Group Protection premium to £229m (H1 2013: £208m). In the US, our protection business delivered a 10% increase in gross premium, up to $553m (H1 2013: $503m).

General Insurance delivered a robust operating profit of £28m (H1 2013: £39m) with a combined operating ratio of 88% (H1 2013: 81%) despite £12m of additional weather related claims in Q1.

Our Savings business continued to deliver on strategy with assets under administration increasing to £117.8bn (H1 2013: £100.4bn). Workplace assets have increased 30% to £9.5bn (H1 2013: £7.3bn), whilst Platform assets increased 26% to £67.4bn (H1 2013: £53.7bn).

LGC increased operating profit to £102m and invested £1.6bn in direct investments (H1 2013 £0.9bn) over the first half of the year supporting improved returns in LGR, LGA and LGC assets, continuing the broad principal investment strategy of increasing risk adjusted returns for the Group whilst supporting the economy directly in housing, infrastructure and healthcare.

 

OUTLOOK:

General Outlook

 

Legal & General's two key economies are the UK and USA, both of which are enjoying some of the strongest growth amongst developed countries. Each of our five core businesses are focused on large markets where we see long term structural growth potential. Our scale, efficiency and track record of innovation mean we are ideally placed to take advantage of these growth opportunities. We estimate the global defined benefit (DB) market, which is at an early stage of a structural de-risking trend, to be approaching $10 trillion on a buyout basis. In the UK defined contribution (DC) market, where we already have a 20% market share of new schemes, we anticipate around 12 million auto-enrolled pension savers by 2030. Our recent acquisition of Global Index Advisors (GIA) gives us access to the $6trillion US defined contribution market.

 

We believe that aligning our strategy to the five macro trends creates a high degree of resilience, although no model can be completely immunised from global risks and uncertainties.

 

Legal & General Retirement (LGR)

Our expertise in the bulk annuity and longevity insurance markets and the clear intention of the majority of defined benefit schemes to de-risk means we are confident in our ability to more than offset reductions in individual annuity sales with higher bulk annuity volumes. With continued strength in our quote pipeline we expect further bulk business to be written in the second half of 2014. In July we completed an internal transfer of £1.9bn of annuity liabilities from our with-profits fund, increasing the size of the annuity portfolio that delivers cashflows and earnings for shareholders.

The changes introduced in the March Budget have introduced greater flexibility for individuals in retirement. These changes will enable us to add further earnings streams and we are already developing a range of individual retirement solutions to address this evolving market.

We do not believe the recent consultation outcome on private sector DB to DC transfers will have a material impact on the current low volume of these transfers given the safeguards announced and the valuable benefit that a DB pension income provides.

 

Legal & General Investment Management (LGIM)

As the UK defined benefit market matures we expect it to continue to de-risk. This will impact our passive equity funds backing DB schemes but will benefit our growing LDI business, where LGIM is the number one player in the market. Also in the UK, we expect growth in the defined contribution market as well as our property and multi-asset offerings.

LGIM's international business continues to gather momentum, particularly in the US, where we are expanding our distribution capabilities and enhancing our product offering across LDI and active fixed income, and into indexed products. Elsewhere LGIM remains focused on opportunities in Europe, the Gulf and Asia.

 

 

Legal & General Assurance Society (LGAS)

We expect our Protection business to leverage its market leading position. We have recently signed new exclusive distribution deals with National Australia Group and TSB which we expect to contribute to further growth in 2015. 

In General Insurance we are seeking to increase the contribution to Group earnings both through organic growth and potential bolt-on acquisition opportunities.

In Savings we continue to enhance Cofunds, the biggest platform in the UK with £67bn of assets. We expect to have a Legal & General D2C proposition available around the end of the year.

In Workplace savings, having secured an estimated 20% of auto-enrolees to date, we expect the strength of our proposition including our 50bps charge cap to deliver further growth. In the immediate future we are on track to halve the 2013 losses of £29m this year.

 

Legal & General Capital (LGC)

LGC is broadening the asset base of the Group and driving more attractive risk adjusted returns across the divisions. As our direct investment capability develops, we see increasing opportunities and growing pipeline through 2014 including €250m investment into European SME loans through our investment in Pemberton Asset Management and developing a UK Private Rented Sector portfolio. Following its acquisition of Banner Homes in March, CALA Group is accelerating its growth, with plans to treble in size with turnover in excess of £800m by 2016.

Legal & General America (LGA)

Our recently introduced price changes are anticipated to result in marginally lower new business volumes in the second half of 2014 when compared to the first half of 2014. LGA remains focused on net cash generation.

LEGAL & GENERAL RETIREMENT.

 

Financial highlights	H1 2014	H1 2013
£m
Operational cash generation	146	130
New business surplus	20	17
Net cash generation	166	147
Experience variances, assumption changes, tax and non-cash movements	22	4
Operating profit	188	151
Bulk annuity single premiums (£bn)	3.1	0.7
Individual annuity single premiums (£bn)	0.4	0.7
Total annuity single premiums (£bn)	3.5	1.4
Annuities net inflows (£bn)	2.5	0.5
Bulk annuity assets (£bn)	24.6	19.6
Individual annuity assets (£bn)	13.9	12.6
Total annuity assets (£bn)	38.5	32.2
Longevity insurance gross premiums	167	92
New business EEV margin (%)	8.4	8.4

 

RECORD PREMIUMS AND INCREASED CASH

Operational cash generation increased 12% to £146m (H1 2013: £130m) reflecting the growth in scale of the business. Net cash generation increased by 13% to £166m (H1 2013: £147m), with new business surplus increasing to £20m (H1 2013: £17m), reflecting our continued ability to source attractively priced assets and effective portfolio strategies to back our new business.

Operating profit increased 25% to £188m (H1 2013: £151m) reflecting this growth, with the stock of annuity assets increasing 20% to £38.5bn (H1 2013: £32.2bn). We continue to benefit from operating through a wide range of distribution channels and being a key player in all the main markets for retirement solutions and pension scheme de-risking.

We remain confident that we will exceed the £4.1bn of annuity premiums written in 2013 as we continue to have a strong quote pipeline. Due to their inherent complexity and size of bulk annuity deals, the timing of deal flows will be unevenly distributed between quarterly reporting periods.

 

NEW BUSINESS MARGINS REMAIN STRONG

We continue to see the annuity market as an attractive place to deploy capital and have delivered a strong new business margin of 8.4% (H1 2013: 8.4%) in the first half.

Our comprehensive range of products, comprising buy-in and buy-out bulk annuities, individual annuities and longevity insurance means that we are able to target our sales appetite to the areas where we expect to optimise our return on economic capital. We have grown annuity premiums by 147% to £3.5bn (H1 2013: £1.4bn) with increased bulk annuity sales dwarfing the lower volumes of individual annuities. We have written more billion pound bulk annuity transactions in the UK over the last three years than all other providers combined due to our numerous competitive advantages built up over nearly three decades, including specialist expertise across longevity, investment management and asset transitioning.

LGC has successfully sourced increased amounts of new assets to back our annuity business, matching the illiquid and long duration profile of our liabilities, including housing and UK infrastructure.These investments enhance risk adjusted yields enabling competitively priced new business and attractive returns to shareholders.

iNCREASING DEMAND FOR GLOBAL DE-RISKING SOLUTIONS

Bulk Annuity single premiums increased 368% to £3.1bn (H1 2013: £0.7bn), including the largest ever UK Bulk Annuity contract with the ICI pension fund, covering £3bn of the Fund's liabilities.

We continue to explore opportunities to use our specialist experience and robust capital base in the global de-risking market. Private defined benefit buy-out liabilities in the key markets of the UK, US, Netherlands and Canada are estimated at approaching $10 trillion, with de-risking solutions becoming increasingly affordable with supportive equity markets.

The acquisition of Lucida, completed in August 2013 is now fully integrated into Legal & General. In an industry where business combinations can be seen as problematic in terms of legacy systems, this was done using only existing resources and systems. On completion of the integration we have released almost £200m from Lucida, recouping the acquisition cost of £149m and covering the majority of the incremental capital required. The Lucida transaction has demonstrated our ability to deliver significant benefits from bolt-on acquisitions.

INDIVIDUAL RETIREMENT

Individual Annuity sales were down 49% to £383m (H1 2013: £754m) following the recent budget changes. In this period of change, we are focused on maintaining pricing discipline. We continue to expect the market to remain subdued with volumes down 50% for 2014 and down a further 50% in 2015.

The flexibility introduced by the Chancellor in his recent budget will increase the choice available to consumers in their retirement. Our individual retirement business is responding to changing consumer demand, presenting new earnings opportunities.

We already offer income drawdown solutions to higher net worth customers, supported by LGAS's existing capabilities, and intend to refresh and relaunch this into a simple income drawdown account to provide flexible access for all retirement savers. LGIM has been developing managed funds, suitable for individuals in retirement, which we expect to form an important part of our product offering.

Many people will not have saved sufficiently to fund the retirement income they would like. We therefore expect that increasing numbers of customers will seek to use the equity in their homes to supplement their retirement income. We are assessing the viability of launching lifetime mortgages to help them do this.

 

LEGAL & GENERAL INVESTMENT MANAGEMENT.

Financial highlights	H1 2014	H1 2013
£m
Total revenue	309	292
Total costs	150	140
Operating profit	159	152
Net cash generation	125	119
Cost:income ratio (%)	49	48
External net flows (£bn)	8.0	13.7
Internal net flows (£bn)	2.4	(0.3)
Total net flows (£bn)	10.4	13.4
of which International (£bn)	5.9	7.6
	H1 2014	FY 2013
Assets under management (£bn)	465.1	449.5
Overlay assets1 (£bn)	174.9	162.1
GIA advisory assets2 (£bn)	13.7	-
Total assets (£bn)	653.7	611.6
International assets under management (£bn)	65.3	59.2
International overlay assets (£bn)	3.8	2.1
GIA advisory assets (£bn)	13.7	-
Total international assets (£bn)	82.8	61.2

1. Overlay assets, presented for the first time, represent the notional value of derivative instruments on which LGIM earns fees. Fees are charged on notional values and as such are not subject to positive or negative market movements.

2. Advisory assets represent the assets on which Global Index Advisors (GIA) provide advisory services.

 

CONTINUED GROWTH IN CASH AND PROFITS

Operating profit increased 5% to £159m (H1 2013: £152m), reflecting growth in revenues whilst maintaining a steady cost:income ratio of 49% (H1 2013: 48%). LGIM continues to invest in its client service proposition and systems infrastructure to ensure it is able to provide innovative investment solutions that are scalable. Total revenues increased 6% to £309m (H1 2013: £292m), with assets under management up 7% to £465bn (H1 2013: £433bn), benefitting from strong demand for de-risking solutions and active strategies, together with positive market returns.

Total asset net flows for the period were £10.4bn (H1 2013: £13.4bn). International asset net flows of £5.9bn (H1 2013: £7.6bn), were driven by strong fixed income and LDI flows in the US and included LGIM's first passive mandate in Asia. In the UK, net inflows of £4.5bn (H1 2013: £5.8bn) reflected strong demand for LGIM's LDI solutions with increasing net derivative overlay asset inflows.

Net flows in our UK passive book included c£5bn of assets being withdrawn by three large clients to either be managed in-house or to fund bulk annuity transactions. Due to the institutional nature of our clients, passive fund flows are variable in nature.

 

STRONG INTERNATIONAL GROWTH

International assets grew by 52% to £82.8bn (H1 2013: £54.4bn). In the US, LGIM's Active Fixed Income and LDI proposition continued to grow rapidly with net inflows of £4.6bn (H1 2013: £1.8bn). LGIM's continued success in the US has been driven by a combination of excellent investment performance, with the majority of composites outperforming their benchmarks over one, three and five years, and a growing need from defined benefit clients for de-risking solutions. LGIM's acquisition of US based Global Index Advisors (GIA) was completed in mid-May, with $23.3bn of advised assets as at the end of June.

In Europe, LGIM won its first flows into its SICAV fund range from the Netherlands. It continues to make progress in Asia as it invests in resources and infrastructure, winning its first passive mandate in the region together with additional active fixed income funds in the first half of the year.  

 

MARKET LEADING DE-RISKING SOLUTIONS

Asset movements	Index	Solutions	Active Fixed Income	Active Equities	Property & other	Total AUM	Overlay Assets	GIA Advisory assets	Total assets
£bn
AUM at 1 January 2014	269.8	70.4	89.4	8.6	11.3	449.5	162.1	-	611.6
Acquisition of GIA assets	-	-	-	-	-	-	-	13.4	13.4
Gross inflows	10.5	4.7	3.7	0.1	0.6	19.6	-	-	19.6
Gross outflows	(19.1)	(2.1)	(2.5)	(0.1)	(0.2)	(24.0)	-	-	(24.0)
Overlay / Advisory net flows	-	-	-	-	-	-	12.3	0.1	12.4
External net flows	(8.6)	2.6	1.2	-	0.4	(4.4)	12.3	0.1	8.0
Internal net flows	0.2	1.0	0.7	(0.2)	0.7	2.4	-	-	2.4
Total net flows	(8.4)	3.6	1.9	(0.2)	1.1	(2.0)	12.3	0.1	10.4
Market and other mvmts	7.3	4.2	5.9	(0.2)	0.4	17.6	0.5	0.2	18.3
As at 30 June 2014	268.7	78.2	97.2	8.2	12.8	465.1	174.9	13.7	653.7

 

Strong equity markets are conducive to de-risking. This has led to clients moving out of passive equity funds and transitioning towards LDI, ahead of potential buy-out. As a result, LGIM has experienced strong inflows and switches into its LDI and active funds, where it benefitted from external net AUM flows of £4.2bn (H1 2013: £6.2bn) in the period. According to KPMG's most recent LDI survey, LGIM is the largest LDI manager in the UK increasing its share of the market to 44%. Total LDI assets, including overlay assets, increased 17% to £253.1bn (H1 2013: £216.6bn) in the period. Overlay assets of £174.9bn (H1 2013: £145.7bn), a key component of Solutions revenue, represent the value of derivative instruments used to help LGIM's clients manage the risk of meeting their future liabilities. LGIM's capabilities and market position means that the Solutions business is extremely well placed to capitalise on the continuing de-risking trend.

Legal & General Property (LGP), the fourth largest institutional real estate manager in the UK, increased AUM by 36% to £12.8bn (H1 2013: £9.4bn), driven by strong net inflows of £1.1bn (H1 2013: £0.2bn). LGIM's property team is attracting growing flows from both retail and institutional clients, whilst it continues to play an integral role in the group's initiative to increase Direct Investments, completing transactions totalling in excess of £0.8bn on behalf of LGC and LGR during the period.

WELL POSITIONED FOR UK SAVINGS TRENDS

UK defined contribution (DC) pension AUM increased 15% to £33.0bn (H1 2013: £28.7bn). Total net inflows of £1.2bn included £0.8bn of net inflows from Legal & General's Workplace Savings platform. LGIM continues to invest in its UK DC proposition, adding resources and creating innovative new products designed to meet the specific needs of DC investors. A core part of this involves the launch of the Real Income Growth Strategy (RIGS) by LGIM's active equities team, which has a real return objective, while its Multi-asset and Solutions teams are developing complementary retirement income strategies. The scale and efficiency of LGIM's passive management and asset allocation capabilities continue to provide competitive advantage to the Group's workplace proposition, particularly in light of the recently announced capping of charges on auto-enrolment default funds at 75bps.

The integration of the Retail arm into LGIM is now complete and is already leveraging the synergies. In July we announced bespoke pricing of our multi-index funds through Cofunds. These funds provide customers with combined exposure to LGIM's Index funds and UK Property Trust, combining the scale of manufacturing of LGIM with Cofunds' distribution capabilities.

 

LEGAL & GENERAL ASSURANCE SOCIETY.

Financial highlights	H1 2014	H1 2013
£m
Operational cash generation	237	231
New business strain	(31)	(54)
Net cash generation	206	177
Experience variances, assumption changes, tax and non-cash mvnts	17	36
Operating profit	223	213

 

INCREASING SCALE AND EFFICIENCY

Operational cash generation increased by 3% to £237m (H1 2013: £231m) as our Protection and Savings businesses grew their stock of premiums and assets respectively. New business strain of £(31)m (H1 2013: £(54)m) included a £15m improvement in Protection new business strain.

LGAS operating profit increased 5% to £223m (H1 2013: £213m). The operating profit of Protection was £179m (H1 2013: £168m) benefitting from increased contribution of our market leading Retail Protection business. This was partially offset by lower profits from our General Insurance business following adverse weather experience in Q1 2014, which resulted in additional claims of £12m and marginally lower Savings operating profit of £44m (H1 2013: £45m).

PROTECTION

Financial highlights	H1 2014	H1 2013
£m
UK Protection new business annual premiums	123	105
UK Protection new business EEV margin (%)	9.3	6.7
UK Protection gross premiums	743	692
General Insurance gross premiums	178	183
Total UK gross premiums	921	875

Retail Protection continued its strong growth with gross premiums up 6% to £514m (H1 2013: £484m). Premiums continued to benefit from the scale and efficiency established with a digital platform that can automatically underwrite in excess of 80% of applications at point of sale. We continue to be the leading provider of Retail Protection to both Independent Financial Advisers (IFAs) and in the market in total and benefit from being the sole provider of Retail Protection to building society partners covering 85% of the sector. Direct Retail Protection APE has increased 56% compared to H1 2013 and now accounts for 16% of new business (H1 2013: 13%) as our business evolves to meet changing consumer purchasing preferences.

Group Protection delivered a 10% increase in gross premiums to £229m (H1 2013: £208m) including a number of large scheme wins, demonstrating the robustness of our market proposition.

UK Protection new business margin increased to 9.3% (H1 2013: 6.7%), benefiting from higher sales and ever increasing operational efficiency.

General Insurance gross premiums were marginally down at £178m (H1 2013: £183m). Operating profit of £28m (H1 2013: £39m) resulted from a strong combined operating ratio to 88% (H1 2013: 81%) and included a £12m impact of the adverse weather experienced at the start of the year.

Legal & General France (LGF) increased APE by 30% to €57m (H1 2013: €44m) demonstrating the strength of our distribution and synergies with our UK Protection business, as we continue to leverage our existing relationships. We continue to see opportunities to grow our business in a large and evolving French Group Protection market.

 

SAVINGS

Asset movements	Platforms1	Workplace	Suffolk Life	Mature Savings	Overseas	Consol. Adj	Total LGAS
£bn
As at 1 January 2014	64.1	8.7	6.6	36.3	4.5	(6.8)	113.4
Gross inflows	4.8	1.3	0.6	0.7	0.2	(0.2)	7.4
Gross outflows	(2.3)	(0.3)	(0.2)	(2.2)	(0.2)	0.4	(4.8)
Net flows	2.5	1.0	0.4	(1.5)	-	0.2	2.6
Market movements	0.8	(0.2)	0.2	1.1	-	(0.1)	1.8
As at 30 June 2014	67.4	9.5	7.2	35.9	4.5	(6.7)	117.8

1. Platforms include Cofunds and Investor Portfolio Services (IPS). 

Growth in LGAS' savings business is based on developing highly scalable and efficient platforms, to offer our straight-forward, low-cost investment products. Savings operating profit was £44m (H1 2013: £45m) with reduced contribution from our mature savings business being offset by better performance in our workplace business as it continues to increase in scale.

Our platform business delivered net flows of £2.5bn (H1 2013: £1.0bn) as assets under administration increased 26% to £67.4bn (H1 2013: £53.7bn) with positive net flows from both our institutional and retail customer base.

The retail savings market is expected to benefit from the greater flexibility in pensions savings, as introduced in the recent budgetary reforms which, coupled with higher ISA limits, is expected to increase retail savings levels. We continue to enhance our existing functionality and improve our operational efficiency to deliver high quality, low cost savings products to existing and potential customers to capitalise on these trends. In June we leveraged our existing Cofunds technology to offer four LGIM index tracker and mixed asset funds to customers of Nationwide Building Society and continue to explore further opportunities to enhance our distribution.  

Legal & General expects to have a Direct to Consumer ('D2C') solution available around the end of the year, to complement and capitalise on the platform capabilities and efficiencies already developed with our intermediated Cofunds platform.

We continue to target an annualised cost saving of £11m p.a. by 2015 from integrating our IPS and Cofunds platforms with a total expected cost to the Group of £17m. To date this initiative has delivered £6m of annualised cost savings.

In Workplace, assets have increased 30% to £9.5bn (H1 2013: £7.3bn) with 1.1 million employees and 1,900 schemes now on the platform. This represents a further 180k customers added since the end of 2013.

Our workplace proposition continues to benefit from incremental enrolment into pre-existing schemes and new schemes, where we currently have a market share of c20% of new schemes being enrolled. Participation rates remain high at more than 90%. The defined contribution market, with the expected tripling of DC savings in the UK over the next 10 years, provides a significant opportunity to the Group. We continue to offer our default auto-enrolment funds at 50bps, below the 75bps cap recently prescribed, capitalising on LGIM's scale and passive fund capabilities.

Workplace has delivered a 50% reduction in unit costs over the last two years, as our auto-enrolment proposition moves towards break-even levels of assets under administration. In H1 2014 Workplace operating losses were £9m.

Our SIPP business, Suffolk Life, delivered net inflows of £0.4bn (H1 2013: £0.3bn).  The business continues to grow through demand for its bespoke SIPP proposition.  As a result the assets of Suffolk Life have increased 26% in the period to £7.2bn (H1 2013: £5.7bn). We continue to look at opportunities to leverage Suffolk Life's existing capped and flexible drawdown expertise in conjunction with LGR, to develop consumer focused products in the evolving UK pensions market.

In Mature Savings assets were £35.9bn (H1 2013: £35.7bn). Net outflows of £(1.5)bn (H1 2013: £(1.8)bn) were in-line with our expectations and partially offset by positive market movements of £1.1bn (H1 2013: £1.3bn).

LEGAL & GENERAL CAPITAL.

POSITIVE CONTRIBUTION TO CASH AND PROFITS

Financial highlights	H1 2014	H1 2013
£m
Operating profit	102	86
Operational cash generation	82	68

 

Legal & General Capital (LGC) increased operating profits by 19% to £102m (H1 2013: £86m) representing the smoothed expected return on LGC assets after expenses, and equates to an assumed annualised investment return of 4.4% (H1 2013: 3.9%) on an average asset base of £4.7bn (H1 2013 £4.6bn).  LGC assets at the half year increased 11% to £5.2bn (H1 2013: £4.7bn).

More generally LGC continues to develop three core functions: (1) direct investments for the principal balance sheet, (2) implementing the Group-wide Asset Liability Management (ALM) and investment strategy and (3) providing Group Treasury services.

 

£1.6BN FURTHER DIRECT INVESTMENT COMPLETED

	H1 2014				FY 2013
£bn	LGR	LGC	LGA & other	Total	Total
Direct Investments	3.7	0.6	0.3	4.6	2.9

 

LGC continues to broaden the asset base of the Group into attractively priced direct investments and is increasingly using the LGC assets to facilitate the widening of investment opportunities, working with LGIM to develop their capabilities and successfully collaborating with investment partners.

LGC continues to invest in housing, investing a further £1.0bn, on behalf of LGC and LGR in the period. This includes a £52m equity injection into CALA Homes to acquire Banner Homes, over £500m of co-purchased property portfolios with LGR and the £252m Places for People deal to acquire 4,000 homes and to help finance 7,000 new homes over 7 years. In addition, a further £181m of commercial lending and £210m of infrastructure investment was completed on behalf of the Group in the first 6 months of the year.

These investments underpin the benefits of Legal & General's strong capital position to diversify the revenue opportunities of the Group. LGC has developed a broad range of partners to ensure good access to direct investments and we continue to see a good pipeline of opportunities for the remainder of the year. In the US in particular, LGC has worked with LGA and external managers to build a portfolio of $375m private placements and USD Commercial Real Estate Lending, with further investments planned.

In July we purchased a 40% stake in Pemberton Asset Management, with a commitment to invest €250m into SME loans across LGAS and LGR, developing a European Private Placement capability. Further asset classes are planned for 2014 including working with Legal & General Property to launch investments in the Private Rented Sector.

 

RESILIENT GROUP-WIDE INVESTMENT STRATEGY

LGC implements the Group-wide ALM and investment strategy for the £48.2bn (H1 2013: £41.9bn) principal balance sheet and £17.1bn (H1 2013: £17.9bn) of with-profits assets of the Group. The principal portfolio is well positioned for the medium term and is predominantly an Investment Grade debt portfolio with low bank sub-debt and peripheral European exposure, closely hedged to liabilities. Over H1, LGC supported LGR in the successful completion of the investment and ALM implementation of the £3bn ICI pension fund bulk purchase deal.

 

Asset portfolio	H1 2014
£bn	LGR1	LGC	Other	Total
Bonds:	34.0	1.6	3.7	39.3
Sovereigns	6.6	0.3	1.4	8.3
Banks	2.0	0.4	0.2	2.6
Other bonds	25.4	0.9	2.1	28.4
Property	1.7	0.3	-	2.0
Equities	0.1	1.6	-	1.7
Derivatives	2.2	0.1	-	2.3
Cash and cash equivalents	0.6	1.6	0.6	2.8
Total financial investments	38.6	5.2	4.3	48.1
Other assets	0.1			0.1
Total investments	38.7	5.2	4.3	48.2

1. LGR assets represent those used to back the Group's non-profit annuity business.

The medium term strategy is to increase direct investments across LGR, LGC and LGA as part of one of Legal & General's core themes, and diversify the portfolio by sector and geography.  The £48.2bn balance sheet includes £1.7bn equity investment (3.5% of principal assets) held predominantly in the LGC asset portfolio.

The investment variance across the Group was £26m (H1 2013: £42m) primarily as a result of changes in LGR's investment portfolio, with greater levels of direct investment, offset by equity returns in LGC asset portfolio which were lower than longer term assumptions.

In LGPL, the Group's main annuity company, we maintain a provision of £2.0bn (FY 2013: £1.8bn) to provide for the risk of credit default. We have experienced minimal defaults over the last five years.

 

EXTENDING THE DEBT MATURITY OF THE GROUP

 

Legal & General continues to have a strong liquidity position reflecting its requirements for working capital and derivative collateral.  In addition the Group's outstanding core borrowings total £3.0bn (FY 2013: £2.5bn). There is also a further £0.7bn (FY 2013: £0.8bn) of operational borrowings including £0.6bn (FY 2013: £0.6bn) of non recourse borrowings. In June 2014 we issued a further £600m of subordinated Tier 2 debt, with a maturity date of 2064 (with a call date of 2044), and coupon rate of 5.5% and extended the overall average maturity of the group's borrowings significantly.

Group debt costs of £63m (H1 2013: £64m) reflect an average cost of debt of 5.2% per annum (H1 2013: 4.7% per annum) on average nominal value of debt balances of £2.5bn (H1 2013: £2.7bn).

 

LEGAL & GENERAL AMERICA.

Financial highlights	H1 2014	H1 2013
$m
Operating profit	72	81
Operational cash generation	73	66
Gross premium income	553	503
New business APE	78	70

CONTINUED GROWTH IN PREMIUMS AND SALES

In H1 2014 Legal & General America (LGA) continued to grow. Sales increased 11% to $78m (H1 2013: $70m), representing a further increase in market share. The growth in sales resulted in a further increase in gross premiums of 10% to $553m (H1 2013: $503m) as we continue to benefit from strong relationships with the brokerage general agents (BGAs), who distribute term assurance in the US market. LGA is the 4^th largest provider of term life assurance by premium in the US and remains the largest provider through the key distribution channel of BGAs.

Operational cash generation increased by 11% to $73m (H1 2013: $66m). This represents the ordinary dividend paid to the Group, which is received in Q1 each year. New business margin has increased to 10.8% (H1 2013: 10.0%) due to mix of business and lower unit costs.

Operating profit was lower at $72m (H1 2013: $81m) due to higher first quarter mortality claims consistent with the general experience across the US life industry.  Claims are expected to normalise at expected levels in the second half of the year.  Operating profit benefited from a 6% reduction in unit costs for in force management due to the growing number of contracts in force, cost-saving actions and successful negotiations to acquire underwriting data at lower costs.

In May, LGA introduced a more refined pricing model, allowing the pricing of risk at a more granular level. As a consequence prices have been raised at lower margin price points and reduced elsewhere. This has led to a change in business mix and we expect a slight reduction in new business volume in H2 2014 as a result.

 

cash generation.

The sources of our cash generation are transparent and the table below highlights the cash generation by segment. Net cash generation increased by 13%, reflecting increased net cash generation across all 5 of our business divisions. This includes the full year ordinary dividend of $73m from LGA which was received in Q1 2014.

 

	H1 2014	H1 2013
£m
LGAS ex. General Insurance	215	201
LGR	146	130
LGA	44	43
Sub total	405	374
LGIM	125	119
LGC	82	68
LGAS General Insurance	22	30
Total from divisions	634	591
Group debt and other expenses	(56)	(54)
Total operational cash	578	537
New business strain	(11)	(37)
Total net cash	567	500

The table above is set out in the format of the cash guidance for 2014 given at the time of the 2013 results announcement.

 

CLEAR VISIBILITY BETWEEN CASH GENERATION AND EARNINGS

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

£m	Op cash	Strain	Net cash	Variances and other	Profit after tax	Tax	Profit before tax
- Protection	166	(8)	158	(20)	138	41	179
- Savings	71	(23)	48	(13)	35	9	44
LGAS	237	(31)	206	(33)	173	50	223
LGR	146	20	166	(18)	148	40	188
LGIM	125	-	125	-	125	34	159
LGC	82	-	82	-	82	20	102
LGA	44	-	44	(17)	27	16	43
Operating profit from divisions	634	(11)	623	(68)	555	160	715
Group debt and other costs	(56)	-	(56)	(6)	(62)	(17)	(79)
Operating profit	578	(11)	567	(74)	493	143	636
Investment and other variances	-	-	-	14	14	(14)	-
Total	578	(11)	567	(60)	507	129	636
Per share	9.82		9.64		8.62
Dividend per share			2.90		2.90

 

BALANCE SHEET STRENGTH.

IGD CAPITAL RESOURCES

As at 30 June 2014 the Insurance Group's Directive (IGD) surplus was £4.7bn (FY 2013: £4.0bn).

The Group's capital resources totalled £8.2bn, covering the capital resources requirement of £3.5bn by 2.36 times. This capital buffer is in addition to the £2.0bn of LGPL credit default provision. Capital resources have increased following the issuance of £600m of Lower Tier 2 debt in June and benefits from the release of £122m of capital following the Part VII transfer of the Lucida book of business to LGAS. The IGD surplus includes allowance for the interim dividend of £172m (FY 2013: final dividend of £408m).

 

Capital	H1 2014	H1 2013
£bn
Group capital resources	8.2	7.3
Group capital resources requirement	3.5	3.3
IGD surplus	4.7	4.0
Coverage ratio %	236	221

ECONOMIC CAPITAL

For the first time we have included details of the Group's economic capital position, which is outlined in more granular detail on pages 77 to 80. Economic capital is the amount of capital that the Board believes the Group needs to hold, over and above its liabilities, in order to meet the Group's strategic objectives. These numbers do not represent our view of the Solvency II outcome for the Group.  Solvency II has elements which L&G considers to be inconsistent with the Group's definition of economic capital, so there will be differences between the two balance sheets.Our Economic Capital model has not been reviewed by the Prudential Regulatory Authority ("PRA"), nor will it be.

As at 31 December 2013 Legal & General Group had an economic capital surplus of £6.9bn, corresponding to an economic capital coverage ratio of 251%. This increased to a surplus of £7.6bn and coverage of 261% as at 30 June 2014, in part reflecting the issuance of £600m of Tier 2 capital during the period.  The economic capital position, excluding dividends proposed, is as follows:

Capital	H1 2014	H1 2013
£bn
Eligible own funds	12.3	11.4
Economic capital requirement	4.7	4.5
Economic capital surplus	7.6	6.9
1-in-200 coverage ratio (%)	261	251

TAXATION.

GROUP TAX RATES - EFFECTIVE TAX RATE OF 20.3%

Equity holders' effective tax rate	H1 2014	H1 2013
%
Total effective tax rate	20.3	21.6
Annualised rate of UK corporation tax	21.50	23.25

In H1 2014, the Group's effective tax rate remained slightly below the UK corporation tax rate due to a number of differences between the measurement of accounting profit and taxable profits.

DEFERRED TAX ASSET UTILISATION

The UK has a deferred tax asset of £53m in respect of trading losses carried forward in Group companies (FY 2013: £93m). The movement in the year includes a £35m (H1 2013: £38m) contribution to net cash generation in LGR and LGAS protection from the utilisation of trading losses. It is expected that the trading losses within LGR remain available throughout the remainder of 2014.

Supplementary EEV disclosure.

EEV highlights	H1 2014	H1 2013
Pence
EEV per share including LGIM	196	190
EEV per share	166	162

 

Analysis of EEV results	H1 2014	H1 2013
£m
Contribution from new business	421	257
Expected return from in-force business	238	211
Experience variances and assumption changes	9	29
Development costs	(14)	(18)
Contribution from shareholder net worth	93	71
EEV operating profit on covered business	747	550
Business reported on an IFRS basis	103	90
EEV operating profit	850	640
Economic variances	8	264
Losses attributable to non-controlling interests	6	7
EEV profit before tax	864	911
Tax and other	(145)	(126)
EEV profit after tax	719	785

EEV PER SHARE

The Group delivered £719m of EEV profit after tax, which after payment of the 2013 final dividend of £408m and foreign exchange, pension deficit and other adjustments of £(54)m, increased EEV shareholders' equity to £9,843m (FY 2013: £9,586m), equivalent to 166 pence per share (FY 2013: 162 pence per share). Including LGIM's external funds in the calculation increases the EEV per share to 196 pence (FY 2013: 190 pence).

 

NEW BUSINESS CONTRIBUTION

Contribution from new business increased to £421m (H1 2013: £257m). The increase reflects increases in each of our three divisions reported on a covered basis, with sales increasing on a PVNBP basis by 32% to £7.7bn (H1 2013: £5.9bn). Worldwide EEV new business margin increased to 5.4% (H1 2013: 4.4%). UK Protection business of 9.3% (H1 2013: 6.7%) benefitted from a continuation of higher new business volumes. LGR delivered a strong and sustained margin of 8.4% (H1 2013: 8.4%) on significantly higher volumes following the ICI bulk annuity deal completed in Q1 2014.

EEV OPERATING PROFIT

EEV operating profit increased 33% to £850m (H1 2013: £640m) as the Group benefitted from higher new business contribution which resulted from an 82% increase in single premium business to £5,118m (H1 2013: £2,810), a 11% increase in annual premium to £549m (H1 2013: £494m) and improved new business margins.

 

EEV PROFIT AFTER TAX

EEV profit after tax was down at £719m (H1 2013: £785m) predominantly as a result of the outperformance in equity markets in H1 2013, not repeated in the first half of 2014, more than offsetting the growth in operating profit.

VALUE OF IN-FORCE (VIF)

The table below illustrates how the discounted and undiscounted value of in-force (VIF) has increased throughout the year.

	Discounted	Undiscounted1
Reconciliation of UK long term business VIF £bn
Opening VIF at 1 January 2014	4.9	10.5
Contribution from new business	0.3	0.8
Unwind of discount rate	0.2	n/a
Expected release from non-profit and with-profits businesses2	(0.3)	(0.4)
Experience variances / assumption changes	-	0.2
Investment variance / economic assumption changes	-	(0.4)
Other	-	-
Closing VIF at 30 June 2014	5.1	10.7

 

1. Management estimates.            

2. Comprises the expected release from non-profit business of £322m and with-profits transfer of £22m.

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 2013: £0.3bn), equivalent to 5p per share (H1 2013: 5p per share).

The external assets component of LGIM is included at the IFRS net asset value of £0.6bn (H1 2013: £0.5bn), equivalent to 10p per share (H1 2013: 8p per share).

Including the external assets component of LGIM on an embedded value basis would increase the contribution of LGIM to the Group embedded value from £0.9bn (15p per share) to £2.6bn (45p per share). In line with the rest of the Group, the embedded value for LGIM excludes any value for future new business.

Estimated LGIM discounted cash flow valuation	H1 2014	H1 2014
	p per share	£bn
Look through value of profits on covered business	5	0.3
Net asset value	10	0.6
Current value of LGIM in Group embedded value	15	0.9
LGIM VIF	30	1.7
Alternative discounted value of LGIM future cash flows	45	2.6

 

Including LGIM, this scenario equates to an indicative valuation per share of 196 pence.

 

Indicative valuation including LGIM	H1 2014	H1 2014
	p per share	£bn
EEV as reported	166	9.9
LGIM VIF	30	1.7
Total including LGIM	196	11.6

 

PRINCIPAL RISKS AND UNCERTAINTIES.

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

 

RISKS AND UNCERTAINTIES   Changes in regulation or legislation may have a detrimental effect on our strategy. Legislation and government fiscal policy 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. Significant changes in legislation or regulation may reduce our future revenues and profitability or require us to hold more capital. We are particularly exposed to risk where legislative or regulatory change is unanticipated or implemented without prior consultation and engagement with the financial services sector. The nature of long term business can also result in some changes in regulation, and the differing interpretation of regulation by regulators over time, having a retrospective effect on our businesses and in force books of business, impacting the value of embedded future profits implicit in those books of business.		trend, outlook and MITIGATION   The recent changes in annuity compulsion announced in the UK budget illustrate how the sector can be impacted by sudden changes in legislative or regulatory frameworks. Whilst we believe our Workplace savings products, a comprehensive suite of low cost retail solutions, and the Cofunds platform, position us well for the evolution of a modern pensions market in the UK, we remain vigilant to the risk that future changes may  have unintended consequences for the financial service sectors in which we operate.   Other areas of uncertainty include Solvency II (SII) and the distribution landscape post the Retail Distribution Review (RDR). With regard to SII, the new capital regulations continue to be targeted for implementation in early 2016. Revised capital calibrations for long term business provide sufficient flexibility to address many of the adverse capital impacts for UK insurance firms. Challenges remain, however, in ensuring that final implementation is proportionate and cost effective for the insurance sector.    We continue to seek to actively participate with government and regulatory bodies in the UK and Europe to assist in the evaluation of change so as to develop outcomes that meet the needs of all stakeholders. Internally, we evaluate the impact of all legislative and regulatory change as part of our formal risk identification and assessment processes, with material matters being considered at the Group Risk Committee and the Group Board.
Investment market performance 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 impact the value of investment assets we hold in shareholders' funds and those to meet the obligations arising from insurance business. Interest rate movement and inflation can also change the value of the obligations. We use a range of techniques to manage mismatches between assets and liabilities. However, financial loss can still arise from adverse investment markets. In addition, significant falls in investment values can reduce the fee income of our investment management business. Broader economic conditions impact the timing of the purchase and the period of retention of retail financial services products, impacting our profitability.		Current macro-economic policies continue to drive record equity markets, bond values and house prices. Whilst we consider the immediate outlook remains positive, a number of factors could result in rapid changes in asset values. These include a toughening of monetary policy and political uncertainty. There is limited resilience in the current investment market environment for such 'shocks' with potential for significant falls in the value of certain asset classes should markets reassess returns.   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. Economic shocks may also impact consumer attitudes in the markets in which we operate. We continue to model our business plans across a broad range of economic scenarios and take account of alternative economic outlooks within our overall business strategy. Our business plans seek to focus upon those market segments that we expect to be resilient across a range of projected conditions.
In dealing with issuers of debt and other types of counterparty the Group is exposed to the risk of financial loss. A systematic default event within the corporate sector, or a major sovereign debt event, could result in dislocation of bond markets, significantly widening credit spreads, and may result in default of even strongly rated issuers of debt, exposing us to financial loss. We are also exposed to banking, money market and reinsurance counterparties, and settlement, custody and other bespoke business services, a failure of which could expose us to both financial loss and operational disruption of our business processes.		Credit spreads continue to reflect market confidence in the issuers of investment grade bonds, and at Legal & General we have continued to experience low levels of default on our corporate bond portfolio. We also continue to diversify the asset classes backing our annuities business, to include the use of property lending, sale and leaseback and other forms of direct investment. There remains, however, a range of factors that could trigger write downs in our investment assets, leading to reduced profitability or financial loss. These factors include deterioration in market confidence in banks particularly in the euro zone and a financial crisis in emerging markets. Whilst we carefully select and monitor the financial strength of all our counterparties, an economic shock or significant change in the current economic outlook may increase potential for a supplier of business services being unable to meet their obligations to us.
As a UK-based Group, our 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, adversely impacting our future revenues and profitability.i		As a significant participant in the long-term savings markets, we are exposed to changes in consumer sentiment. We are also exposed to increased costs of regulatory compliance through regulatory and legislative responses to events in the broader financial services sector. Recent examples include the EU transaction tax and the central clearing of certain derivative instruments, which would increase the costs associated with pension savings products and annuities, respectively. In mitigation of sector contagion risks we actively manage our brand and seek to differentiate our business model from that of our competitors. To ensure regulation is appropriate and proportionate we also seek to engage with our regulators to support their understanding of the risk drivers in the financial services markets. The nature of the business environment in which we operate, however, means that we cannot remove ourselves from the adverse consequences of market events and we will continue to be exposed to residual contagion risks.
Reserves for long-term business may require revision as a result of changes in experience, regulation or legislation. The writing of long-term insurance business requires the setting of assumptions for long-term trends in factors such as mortality, lapse rates and persistency, valuation interest rates, expenses and credit defaults. Actual experience may result in the need to recalibrate these assumptions reducing profitability. Forced changes in reserves can also be required because of regulatory or legislative intervention in the way that products are priced, reducing profitability.		We regularly appraise the assumptions underpinning the business that we write taking account of demographic trends and long term economic outlook. In our annuities business we are, however, exposed to factors such as improvements in medical science beyond those anticipated leading to unexpected changes in life expectancy. In protection business we remain inherently exposed to loss from events causing widespread mortality/morbidity or significant policy lapse rates. There is also potential for legislative intervention in the pricing of insurance products irrespective of risk factors, such as age or health.
The Group may not maximise opportunities from structural and other changes within the financial services sector. 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, and in turn future revenues and profitability.		Macro trends in the markets in which we operate include an ageing population, the increasing use of digital technologies and significant reform in the provision of state welfare. Within the investment management business asset classes are increasingly homogeneous providing opportunities for businesses with scale such as us. The retrenchment of the banks also provides opportunity for insurance firms to participate in investment and lending activities. Responding to these macro trends potentially creates organisational challenges and management stretch across the range of initiatives. We remain vigilant to these risks and have structure our business to support their practical management.
A material failure in our business processes may result in unanticipated financial loss or reputation damage. We have constructed our framework of internal controls to minimise the risk of unanticipated financial 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 to our brand. Our plans for growth inherently will also increase the profile of operational risks across our businesses.		We continue to invest in our systems capabilities and business processes so that we meet the expectations of our customers; comply with regulatory, legal and financial reporting requirements; and mitigate the risk of significant financial loss or reputational damage from operational risk events. Our risk governance model seeks to ensure that business management are actively engaged in ensuring an appropriate control environment is in place, with risk oversight and independent assurance of our internal control environment being provided by our Group Risk and Group Internal Audit functions, respectively.
The financial services sector is increasingly becoming a target of 'cyber crime'. As we and our business partners increasingly digitalise our businesses, we are inherently exposed to the risk that third parties may seek to disrupt our on-line business operations, steal customer data or perpetrate acts of fraud using digital media. A significant cyber event could result in reputation damage and financial loss.		Cyber-crime and attempts by third parties to seek and exploit perceived vulnerabilities in IT systems remains a key risk within the financial services sector. Potential threats include denial of service attacks, network intrusions to steal data for the furtherance of financial crime, and the electronic diversion of funds. We continue focus on maintaining a secure IT environment that protects our customer and corporate data and seek to proactively address emerging threats. The nature of cyber threats, however, means residual risk remains.

Enquiries.

Investors:

Laura Doyle                                                                 Head of Investor Relations                                                                     020 3124 2088

 

Stephen Thomas                                                        Investor Relations Manager                                                                       020 3124 2047

 

Media:

John Godfrey              

Group Communications Director                                                       020 3124 2090

 

Richard King              

Head of Media Relations                                                                     020 3124 2095

Michelle Clarke           

Tulchan Communications                                                                  020 7353 4200

 

Katharine Wynne       

Tulchan Communications                                                                  020 7353 4200

Notes

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

A presentation to analysts and fund managers will take place at 10.30 GMT today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of the presentation which can be accessed at http://investor.legalandgeneral.com/results.cfm. A replay will be available on this website later today.

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

 

 

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Financial Calendar	Date
Ex-dividend date	27 August 2014
Record date	29 August 2014
Payment date of 2014 interim dividend	1 October 2014
Q3 Interim Management Statement 2014	4 November 2014
Preliminary Results 2014	4 March 2015

 

DEFINITIONS

Operational cash generation is the expected release from in-force business for the UK non-profit LGAS and LGR businesses, the shareholder's share of bonuses on with-profits business, the post-tax operating profit on other UK businesses, including the expected investment return on LGC invested assets, and dividends remitted from our international businesses.

Net cash generation is defined as operational cash generation less new business strain.

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

The Group's principal balance sheet includes those assets to which shareholders are exposed, excluding assets where our customers have the total market risk and reward.

Forward-looking statements

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