L&G Half Year Results 2016 Part 1

Stock Exchange Release                                                                                                                

09 August 2016                                                                                                   

net cash generation up 16%, RoE¹ of 20%, SII SURPLUS oF £5.3BN

financial highlights²: 

·      Net cash GENERATION up 16% to £727m (h1 2015: £629m)

·      adjusted OPERATING PROFIT³ up 10% to £822M (h1 2015: £750m)

·      Profit after tax UP 22% to £667m (h1 2015: £547m)

·      Earnings per share up 24% to 11.27P (h1 2015: 9.11p)

·      adjusted Earnings per share⁴ UP 14% to 11.20P (h1 2015: 9.79p)

·      return on equity¹ 20.4% (h1 2015: 19.1%)

·      SOLVENCY II SURPLUS OF £5.3BN (FY 2015: £5.5BN)

·      SOLVENCY II COVERAGE RATIO OF 158%, (163% oN a SHAREHOLDER BASIS)

·      new formulaic approach to setting the interim dividend: 30% of 2015 full year dividend at 4.00p per share

business highlights: 

·      lgr ANNUITY ASSETS UP 18% AT £51.0BN (h1 2015: £43.4BN)

·      GROUP-WIDE DIRECT INVESTMENT UP 28% AT £8.0BN (h1 2015: £6.2bn)

·      LGIM AUM UP 18% AT £841.5BN (h1 2015: £714.6BN)

Nigel Wilson, Group Chief Executive, said:

"We have continued to execute our strategy well. Shareholders' profit before tax grew 23% to £826m, adjusted EPS grew 14% to 11.2p, net cash generation grew by 16% to £727m and the Group delivered a 20% RoE. We have a strong balance sheet, which gives us the flexibility and capacity to invest in support of each of our businesses.

There are many different views of the outlook for economic growth, the state of financial markets and political uncertainty. We reflect this in our approach to risk management. While we cannot be immune to this uncertainty, we remain confident that we will continue to deliver attractive returns for shareholders, great value to customers and better outcomes for society. Our five long-term growth drivers, ageing populations, globalisation of asset markets, creating real assets, welfare reform and digital remain unaffected and will continue to provide many growth opportunities."

1.   Return on equity is calculated by taking annualised profit after tax attributable to equity holders of the Company (twice the half-year number), as an average of shareholders' equity during the period, excluding a £4m profit in relation to the disposal of Suffolk Life (H1 2015: £40m impairment loss in relation to the subsequent disposals of Legal & General France and Legal & General Gulf).

2.   The metrics within the Group's financial highlights are defined in the glossary.

3.   Adjusted operating profit is calculated as operating profit of £777m (H1 2015: £750m) before the cost of the provision in respect of the closure of our Kingswood office of £45m (H1 2015: £nil).

FINANCIAL SUMMARY

LEGAL & GENERAL RETIREMENT (LGR)

LEGAL & GENERAL INVESTMENT MANAGEMENT (LGIM)

LEGAL & GENERAL CAPITAL (LGC)

INSURANCE

SAVINGS

LEGAL & GENERAL AMERICA (LGA)

1.       LGIM total AUM includes £244.0bn (H1 2015: £208.1bn) of derivative overlay assets associated with the Solutions business.

2.       LGIM AUM includes £51.0bn (H1 2015: £43.4bn) managed on behalf of LGR and £31.5bn (H1 2015: £34.0bn) managed on behalf of Savings.

3.       Savings AUA as at 30 June 2015 included £8.3bn in respect of Suffolk Life, a business which was disposed of in H1 2016, and £2.8bn in respect of Legal & General International (Ireland), a business which was disposed of in H2 2015.

4.       LGA gross premiums excludes $65m (H1 2015: $nil) of US pension risk transfer business which is reported within LGR.

commentary on h1 financial performance

Income statement

Adjusted operating profit increased 10% to £822m (H1 2015: £750m).

LGR delivered a 44% growth in operating profit, to £406m (H1 2015: £281m), driven by strong back book performance feeding through to operational cash generation of £205m (H1 2015: £171m) and strong front book activity generating new business surplus of £79m (H1 2015: £22m). Refinements to the valuation methodology for longevity swaps resulted in a £58m one off benefit to operating profit. Longevity experience in the period was also positive compared to our best estimate assumption.

LGIM operating profit fell by 3% to £171m (H1 2015: £176m). Management fee revenues were up 4% to £337m (H1 2015: £324m) but transactional revenues were lower at £16m (H1 2015: £23m), driven by fewer property transactions. The average monthly closing assets under management (AUM) for the six months was £784.1bn (H1 2015: £715.2bn). There was a significant appreciation in asset values towards the end of June, which increased the H1 2016 closing AUM to £841.5bn (H1 2015: £714.6bn).

Insurance operating profit fell by £48m to £138m (H1 2015: £186m) primarily as a consequence of a c.£40m lower  expected release from the UK Protection back book, adverse mortality experience of £18m (H1 2015: £5m positive), mainly in our Group Protection business, and the introduction of the annual Flood Re levy for our General Insurance business of £9m, the cost of which was expensed in H1 2016. H1 2015 operating profit also included £7m operating profit from Legal & General France, which was disposed of on 31^st December 2015. These impacts were partially offset by improved new business surplus and a £31m positive assumption change following a review of the prudence held for renewal expenses.

The LGC operating profit increased by 17% to £135m (H1 2015: £115m), driven by the operating businesses within our LGC direct investments portfolio, which delivered operating profits of £36m (H1 2015: £10m).

Operational cash generation increased 5% to £655m (H1 2015: £624m)

Operational cash generation has increased broadly in line with the guidance we previously issued. LGR delivered a £34m increase in operational cash generation to £205m (H1 2015: £171m) resulting from a higher expected release following assessment of the prudence held within our reserves.

Net cash generation increased 16% to £727m (H1 2015: £629m)

New business surplus increased to £72m (H1 2015: £5m). LGR delivered new business surplus of £79m (H1 2015: £22m) resulting from significantly higher annuity sales of £3.8bn (H1 2015: £1.3bn). Bulk annuity sales were £3.6bn including a £2.9bn back book annuity transaction with Aegon, for which we have retained the longevity risk. In H1 2016 we reinsured £444m of longevity risk in relation to new business.

Insurance delivered new business surplus of £7m (H1 2015: £nil) reflecting higher levels of efficiency on an increasing premium base. Total UK Retail and Group protection premiums increased 5% to £815m (H1 2015: £774m).

Shareholders' profit before tax increased 23% to £826m (H1 2015: £672m), including Group investment variances of £58m (H1 2015: £(29)m).

We manage our exposure to interest rate and foreign exchange at a legal entity and Group level. At a divisional level however, profit before tax has been impacted by reductions in interest rates and movements in foreign exchange. Specifically:

Insurance profit before tax reduced to £46m (H1 2015: £138m), with negative investment variance of £(92)m (H1 2015: £(48)m) following a c.1% reduction in UK government bond yields, impacting the discount rate used to calculate the reserves for our UK Protection liabilities;

LGR profit before tax benefitted from a £63m (H1 2015: £11m) positive investment variance arising from active management of the assets in the annuity fund; and

LGC profit before tax benefitted from a positive investment variance of £60m (H1 2015: £(4)m) primarily driven by foreign exchange gains, particularly on un-hedged US dollar denominated investments.

balance sheet

Capital

The Group's Solvency II surplus at the half year was estimated at £5.3bn, representing a coverage ratio of 158% (FY 2015: surplus of £5.5bn, coverage ratio of 169%). This is stated after recalculation of Transitional Measures for Technical Provisions.

Eligible own funds were £14.3bn (FY 2015: £13.5bn), the solvency capital requirement (SCR) was £9.0bn (FY 2015: £8.0bn) resulting in a surplus of £5.3bn (FY 2015: £5.5bn).

Eligible own funds increased by £0.8bn reflecting surplus generated net of investment movements in H1 2016 and positive management actions offset by the payment of the 2015 final dividend of £592m. Management actions included removing eligibility restrictions on assets held in reassurance collateral accounts where the specific trust structure had made the surplus assets ineligible under the Solvency II rules, the treatment of which is awaiting regulatory approval. In addition we have reviewed the provision for specific items, including bulk purchase annuity data loading and Solvency II allowing for negative reserves. The SCR increased by £1.0bn from year-end 2015, largely driven by the fall in risk free rates.

On a shareholder basis, adjusting for the Own Funds and SCR of the With-profits fund, the Group's Solvency II coverage ratio was 163% with eligible own funds of £13.7bn and SCR of £8.4bn.

Overall, our Solvency II balance sheet has demonstrated its resilience to recent market volatility, including that caused by the market reaction to the EU Referendum outcome, just before 30^th June 2016.

The Group remains focussed on delivering appropriate returns on the capital we choose to deploy. We estimate, using a Solvency II cost of capital, that LGR will deliver a 10.2% new business margin and our UK insurance business an 11.1% new business margin for the business we have written in H1 2016.

The Group's economic capital surplus was £8.1bn (FY 2015: £7.6bn), representing a coverage ratio of 235% (FY 2015: 230%). Eligible own funds was £14.0bn (FY 2015: £13.5bn) and the economic capital requirement was £5.9bn (FY 2015: £5.9bn).

Asset portfolio

Shareholder investment exposure arises mainly in the LGR and LGC investment portfolios. Our largest exposure within the shareholder investment portfolio is to credit assets.

Our global credit team keeps our portfolios under continuous review and in recent months has actively de-risked the credit component of Eligible Own Funds as well as LGR's £47.9bn 'A minus' rated bond portfolio. This has included selling sub-investment grade credit and reducing our exposure to European banks' subordinated debt.  The portfolio is well diversified by sector and by geography. 

Elsewhere in the shareholder investment portfolio there is £2.5bn of property, of which 94% is fully let and a further 4% is property under development. The vast majority of the Group's property assets are held for their income characteristics as opposed to capital appreciation.

DIVIDEND

The Board adopted a progressive dividend policy in March 2016 reflecting the Group's expected medium term underlying business growth, including net cash generation and operating earnings. There is no change to this dividend policy.

For this interim dividend and going forward the Board has decided to adopt a formulaic approach to setting the interim dividend, being 30% of the prior year full year dividend.  We have therefore declared an interim dividend of 4.00p per share. 

outlook

The Group's strategy is aligned to, what we believe to be, five established long term growth drivers: ageing populations; globalisation of asset markets; creating real assets; welfare reform; and digital. There are a range of different views amongst market commentators regarding the potential impacts of the recent EU referendum result on the wider economy, and this in turn has created greater market volatility which, we expect to continue for some time.  Although no business model can be immunised against slowing global economic activity, the opportunities available to the Group should remain largely unchanged and we will strive to execute our strategy successfully to deliver profitable growth.

International demand for pension risk transfer solutions remains strong and is expected to continue for many years. In the UK alone, we are currently quoting on over £13bn of buy-in and buy-out deals and over £16bn of longevity deals.  We will remain disciplined in the deployment of our capital, selecting the opportunities that deliver the best return on capital across annuity and longevity transactions. Our self-manufacturing and wider asset management capabilities, together with deep understanding and management of longevity risk, mean we anticipate being able to provide effective solutions for our clients.

The lifetime mortgage market grew 24% in H1 2016 to £934m and is on track to exceed £2bn for the first time in 2016. We are targeting to write up to £500m of lifetime mortgages new business in 2016, which would represent approximately 25% of the market.

LGIM had a good first half against the backdrop of challenging investment markets, with £9.6bn of external net inflows. It is well positioned to handle the uncertain economic and political environment that lies ahead, and continuing fee pressure in asset management markets. LGIM is focused on serving its clients and providing innovative risk management solutions and thereby delivering growth and diversification in its chosen markets. 

LGC will invest further shareholder capital in housing; infrastructure and SME finance, where we expect there to be attractive returns. In the wider context, it also provides wider benefit to the Group with improved access to additional assets and fee earning opportunities.

We intend to switch a larger proportion of assets within both LGR and LGC from traded assets to direct investments, with a medium term target of £15bn.

LEGAL & GENERAL RETIREMENT

record profits

LGR profitability increased on all measures. 

Operational cash generation increased to £205m (H1 2015: £171m), benefitting from increased releases of prudential margins as we continue to refine our assessment of best estimate reserves.

Net cash generation increased to £284m (H1 2015: £193m) with new business surplus of £79m (H1 2015: £22m) reflecting higher levels of new business and a 10.2% new business margin on SII capital. The net cash generation benefited in particular from the Aegon back book acquisition, for which we have retained the longevity risk. 

Operating profit increased to £406m (H1 2015: £281m) including a £58m one-off benefit from a change in treatment to historic longevity insurance deals where future fees in excess of prudent estimates of longevity and expense experience are now included as an offset to IFRS reserves.  This is now consistent with the approach used for other product lines across the Group. 

ONGOING credit and ASSET management

Credit portfolio management

LGR's £51.0bn asset portfolio backing its IFRS liabilities is well diversified. We hold £2.7bn of credit default reserves (2015: £2.2bn) against these assets. Within the £47.9bn bond portfolio, just over 2/3rds of the portfolio is A-rated or better (67%), 30% BBB-rated and 3% sub-investment grade.  The bond portfolio has 4.7% in Banks, 4.7% in Oil & Gas and 3.9% in bonds in the property sector, illustrating the high degree of diversification in the portfolio.

Direct Investment

Our direct investment portfolio is secured through directly negotiated covenants and security or collateral.   This portfolio is now £6.2bn, (H1 2015: £4.9bn) with a further £440m in lifetime mortgages.  The ability to self-manufacture attractive assets to back annuities, working with LGIM, LGC or through lifetime mortgages, is an important feature of LGR's business as the hunt for yield continues with lower for longer interest rates.  

diverse new business OPPORTUNITIES

The global demographic trend of ageing populations is here to stay.  The need for products and services to manage the consequences of ageing populations is increasing, and our strategy is to be at the forefront of providing those products and services.  One such consequence is the demise of private sector defined benefit pensions globally and its associated need for a managed run-off.  Another consequence is more individuals aiming for financial security in retirement and a need to accumulate wealth, and then access this wealth flexibly in retirement.  Our new business themes of Global Pension Risk Transfer and Individual Retirement Choices are there to meet these two substantial and growing needs.

Global Pension Risk Transfer

We completed £686m of buy-ins and buy-outs in the first half of 2016, and a further £750m buy-in with the ICI Pension Fund on 5th July.  The £686m included £250m in June alone and a $65m US bulk annuity deal in February. 

The UK private sector defined benefit market is estimated at £2 trillion and the UK market pipeline for pension risk transfer remains strong.  We are currently quoting on over £13bn of buy-in and buy-out deals and over £16bn of longevity deals.  Whilst lower real yields increase the average pension fund deficit, the post referendum outcome for pension funds has varied meaningfully depending on the amount of LDI hedging they have done, the extent to which equities have been switched to bonds, and the extent to which equities have been diversified globally with or without currency hedging.  We estimate that at least 50% of the interest rate and inflation risk has been removed from the UK private sector defined benefit system.

Furthermore, pension funds are looking to de-risk in steps that can include tranches of pensioner buy-ins, top-slicing, medically underwritten bulk annuities or longevity insurance as a first step.  Pension funds do not need to be fully funded or fully hedged to make progress.  Legal & General is well placed for this incremental approach as a financially sound partner, committed to the pension risk transfer market. We are unique in being able to offer all possible pension risk transfer and DB pension de-risking steps. 

Our aim is to recreate this strategy in the US.  The market pipeline of deals is substantial, we continue to quote diligently and build our experience in this market.  Our reinsurance hub, L&G Re, A+-rated, in a Solvency II equivalent regime, and with registered reinsurer status in the Netherlands, allows us to participate as a reinsurer in European pension risk transfer market.  We are quoting on several deals and are looking to build on last year's new business.

Individual Retirement Choices

We remain committed to the individual annuity market and wrote £158m in H1 2016, down 12% from the £180m written in H1 2015.   In July, we agreed an arrangement with Aegon where Legal & General would be Aegon's preferred supplier of annuity business from October 2016.  We expect this arrangement to increase Legal & General's individual annuity volumes by approximately 50%.

Lifetime mortgage lending was £231m in H1 2016 (H1 2015: £37m). The lifetime mortgage market grew 24% in H1 2016 to over £900m  and is on track to exceed £2bn for the first time in 2016. The number of people over 60 years old is expected to grow by 6.3 million in the next 20 years.  This fact coupled with an estimated £1.4 trillion of housing equity currently owned by the over 65s in the UK, makes the long-term growth characteristics of this market strong.

In July 2016 we signed a 5 year agreement with Santander to offer Lifetime Mortgages to their customers. We anticipate that this will result in an additional £100m of lifetime mortgages per annum.

Industry consolidation

The combination of Freedom & Choice in Pensions and the introduction of the EU's Solvency II regime has already led to consolidation among individual and bulk annuity providers.  We participated in this consolidation in May with the acquisition of a £2.9bn back book of individual annuities from Aegon.  In July we agreed a five year distribution agreement with Aegon to offer Legal & General annuities to Aegon customers from October 2016.  The partnership is expected to generate around £200m of individual annuity sales in the first 12 months.  We remain interested in further consolidation opportunities.

 LEGAL & GENERAL investment management

1. Excluding Workplace Savings and recoverable market data costs which are treated as a cost of sale. 

2. Assets under management include overlay assets, which represent the notional value of derivative instruments on which LGIM earns fees. Fees are charged on notional values and as such are not subject to positive or negative market movements.

resiliencE in challenging markets

The business environment in the first half of 2016 has been challenging, given political and economic uncertainty and volatile market conditions. Against this backdrop, LGIM performed robustly in the first half of 2016, with operating profit down 3% to £171m (H1 2015: £176m).  External net flows remained positive at £9.6bn (H1 2015: £13.8bn), contributing to 18% growth in AUM to £841.5bn (H1 2015: £714.6bn).  Management fee revenues were up 4% to £337m, although transactional revenues were lower at £16m, driven by fewer property transactions.

LGIM continued its prudent investment across the business, with a focus on the areas that will provide growth and diversification in the future, resulting in a cost income ratio of 50%.  The International business had strong net inflows of £6.7bn (H1 2015: £5.4bn), with positive flows in the US, Europe, the Gulf and Asia. The retail business performed strongly in a difficult market for investors, with external net inflows of £0.7bn (H1 2015: £0.3bn) and increased market share.  In Workplace Savings, the operating loss was £3m (H1 2015: loss of £3m), as LGIM incurred acquisition costs to take on large pension schemes.

breadth of investment management solutions

Total AUM increased 18% to £841.5bn (H1 2015: £714.6bn). Total external net inflows of £9.6bn (H1 2015: £13.8bn) were good in the context of political and economic uncertainty, and a difficult market.  The strength of flows across our main product lines and channels reinforces the importance of diversifying our business, and illustrates the breadth of LGIM's investment capabilities. 

LGIM's liability-driven investment (LDI) and Multi-asset businesses have continued to grow over H1 2016. LGIM was the largest single beneficiary of a 25% increase in LDI mandates in 2015 and remains the UK market leader with a 44% share, according to the 2016 KPMG LDI survey.  LGIM continues to gain market share in pooled LDI, which is the fastest-growing segment of the market. Solutions net inflows, including LDI and multi-asset products, were £6.7bn (H1 2015: £12.3bn). 

Index external net inflows of £1.6bn (H1 2015: £1.2bn outflow) were driven by the continued international diversification of this business, with net inflows of £5.7bn (H1 2015: £2.9bn) from the US, Europe, the Gulf and Asia.

Net external inflows into Active Fixed Income of £1.3bn (H1 2015: £2.3bn) were driven primarily by institutional clients in all our main regions.  

The Retail business has performed strongly in an extremely difficult period with external net inflows of £0.7bn (H1 2015: £0.3bn), and it continues to gain market share.  LGIM was second in net retail sales in Q2 2016, in what was a difficult quarter for the fund management industry (Pridham report). AUM increased to £21.4bn (H1 2015: £18.9bn). 

The Real Assets business has been impacted by the uncertainty caused by the referendum, leading to fewer transactions in the property market. LGIM has been able to keep its funds open during this period of significant volatility. External net inflows were £0.1bn (H1 2015: £0.4bn), with AUM of £18.4bn (H1 2015: £16.7bn).

OVER Two Million CUSTOMERs IN WORKPLACE PENSIONS

LGIM has continued to build its defined contribution (DC) client base, winning schemes from across the market on both its investment only and workplace platforms.  The total number of clients on its workplace platform now exceeds two million, in nearly 7,000 schemes. Net inflows were £0.8bn (H1 2015: £1.0bn) and total assets increased by 16% to £49.8bn (H1 2015: £42.8bn). LGIM has acquired a minority stake in Smart Pension, a fintech business, which will expand our presence in the SME market.

INTERNATIONAL expansion continues 

LGIM experienced strong net inflows of £6.7bn (H1 2015: £5.4bn) in its international businesses.  Total International AUM was £151.9bn, a 31% increase on H1 2015: £115.8bn. Net inflows in the US business were £3.1bn (H1 2015: £4.8bn), with new defined benefit (DB) and DC mandates. The business continues to build its LDI and fixed-income capabilities, and growth in Index is accelerating. In the Gulf, inflows were £1.6bn (H1 2015: £0.9bn) as we deepened our existing client relationships. In Europe, net inflows were £1.5bn, driven by strong interest in our fixed income and multi-asset products. In Asia, LGIM strengthened its presence in the Japanese market, with inflows from our partnership with Meiji Yasuda and the signing of a second co-operation agreement with Nikko Asset Management.  Asian net inflows for the period were £0.5bn (H1 2015: £0.1bn outflow). 

LEGAL & GENERAL CAPITAL

1. LGC traded portfolio includes holdings in consolidated funds, which include net non-financial receivables and payables of £15m (H1 2015: £nil), which are reported separately in the Group's consolidated financial statements.

CORE UK TRENDS DRIVING DIRECT INVESTMENT STRATEGY

The direct investment portfolio delivered operating profit of £68m (H1 2015: £32m).

Operating profit is calculated on an actual profit before tax basis or a smoothed IRR basis dependent on the category and stage of maturity of the investment. Direct investments from our operating business, such as CALA Homes, are recognised as our share of PBT, delivered £36m, representing 53% of direct investment operating profit (H1 2015: £10m, 31%).

The past six months has seen LGC continue to perform strongly, with considerable further investment in core sectors. Driven by long term social and economic trends, LGC invests in enterprises which contribute to UK growth with a focus on Housing, Infrastructure and SME finance. LGC targets attractive risk-adjusted returns for the Group whilst creating longer-term investment opportunities for other parts of Legal & General and institutional investors.

Housing operating profit increase to £39m in H1 2016 (H1 2015: £15m)

CALA Homes delivered another year of strong performance, recording record revenues and profits.  Private completions were up c.8% with private average selling price up c.6%. Strong levels of forward private reservations provide Cala with good visibility as the Group heads into the new financial year.

LGC launched a £600m build-to-rent JV with PGGM in early 2016 which now has three seed assets in Walthamstow, Bristol and Salford to build a total of 830 homes. Further sites are currently being targeted to support the growth of this platform. LGC continued to focus on realising the potential of its bank of strategic land, including a 250-acre site at Crowthorne with a GDV of approximately £450m where work has started to build c.1,000 new homes.  LGC also launched its modular homes business which seeks to modernise home building, and opened a new facility outside Leeds. Fit-out of the factory continues and interest in the product is strong.

Infrastructure, operating profit increase to £24m in H1 2016 (H1 2015: £15m)

Infrastructure includes urban regeneration and clean energy asset classes. During the period, plans were submitted to double the size of MediaCityUK (Salford) over the next decade, including up to ten new buildings with a GDV of more than £1bn. To date, the Lexicon (Bracknell) has signed several retail leases in a £200m scheme, bringing space let by floor area to 64% ahead of a 2017 opening. New tenancies have been completed at Thorpe Park (Leeds), including an agreement with Next during the period and further signings with M&S Simply Food and Arcadia post Brexit. In Cardiff, 97% of One Central Square has been let at the site adjacent to BBC Wales' new building which was acquired by LGR in 2015. Overall, property valuations held up in the period.

LGC also agreed to partner with Newcastle City Council and University to develop the £350m Science Central 24-acre science and technology hub, and is set to create over 4,000 jobs, 500,000 sq ft of office space and 450 new homes.

In clean energy, LGC's investment in NTR onshore wind fund reached final close in February at €246m, with new commitments made by the Ireland Strategic Investment Fund and Strathclyde Pension Fund.  During the period, NTR managed the successful project financing of two of the Fund's wind farm projects, and acquired new sites to construct a further 27 MW capacity, bringing the total generating capacity for the fund to 82.5 MW.

Going forward, LGC continues to seek partnerships with local developers and stakeholders across the UK's towns and cities, and maximise its partnership with the Regeneration Investment Organisation (RIO), whilst maintaining discipline over return on investment requirements.

SME Finance operating profit increase to £5m in H1 2016 (H1 2015: £2m)

Since the period ended, Pemberton has invested 78% of the committed capital from its inaugural European Mid-Market Debt Fund, a fund which is targeting €1-1.5bn and will hold the final close in the next three months. The business continues to perform strongly.

TRADED PORTFOLIO

LGC's traded investment portfolio delivered operating profit of £59m (H1 2015: £79m). Treasury assets contributed a further £8m (H1 2015: £4m) to operating profit.

Investment variance on the traded investment portfolio and treasury assets was £77m (H1 2015: £(7)m), resulting in a combined profit before tax from traded assets of £144m (H1 2015: £76m).

The traded book holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash. Overall the book performed above assumed returns over the half year period, benefiting from further global yield compression in the fixed income book. The portfolio also benefited from a currency translation effect on foreign holdings from the devaluation of GBP following the market reaction to the outcome of the EU Referendum.

LGC holds cash for a variety of reasons including working capital, collateral to cover derivatives trades and cash awaiting longer term investment. In addition, Group Treasury holds cash and near cash investments to cover a range of uses including working capital, imminent known cash flows and collateral to cover derivatives.

INSURANCE

sustained net cash generation

Operational cash generation reduced by 2% to £159m (H1 2015: £161m). This included £48m (H1 2015: £18m) of dividends received from Legal & General Netherlands as we continue to optimise the efficiency of our balance sheet. This additional £30m is not expected to repeat in H2 2016. UK Protection operational cash generation was lower at £80m (H1 2015: £112m) following changes to the modelling for reinsurance contracts in 2015, to ensure sufficient prudence is being held in later years.

New business surplus was £7m (H1 2015: £nil) as we maintain a disciplined focus on cost management and benefitted from further scale efficiencies.

continued growth in premium income

Retail Protection gross premium income increased 7% to £582m (H1 2015: £545m) with new business annual premium of £82m (H1 2015: £79m). We remain a leading provider of Retail Protection in the UK and benefit from a highly efficient automated underwriting model and broad distribution reach. Our direct distribution channel delivered Retail Protection new business APE of £16m, representing 14% growth on H1 2015 and now accounts for 20% of new business APE (H1 2015: £14m, 18% of new business APE). Group Protection gross premium was £233m (H1 2015: £229m) with new business of £36m (H1 2015: £40m).

General Insurance gross premiums reduced to £156m (H1 2014: £164m) as we maintained pricing discipline in a competitive market. Our direct business delivered GWP of £54m in H1 2016, representing 15% growth on H1 2015 and now accounts for 35% of gross premiums (H1 2015: £47m, 29% of gross premiums).

Legal & General Mortgage Club facilitated £26bn of mortgages in H1 2016 (H1 2015: £20bn) through strong partnerships with top lenders and over 9,000 mortgage brokers. As the largest participant in the intermediated mortgage market in the UK, we are now involved in one in five of all UK mortgage transactions. Legal & General Surveying Services continues to deliver a strong performance, completing over 250k surveys (H1 2015: c.240k).

operating profit impacted by ADVERSE GROUP LIFE MORTALITY

Insurance operating profit fell by £48m to £138m (H1 2015: £186m) as a consequence of a £40m lower expected release from the UK Protection back book and adverse mortality experience of £18m (H1 2015: £5m positive), mainly arising in our Group Protection business. Our General Insurance operating profit was £31m (H1 2015: £38m), despite the impact of the flash floods in June, which cost c.£5m and the introduction of the  annual Flood Re levy of £9m, which added 6% to the H1 combined operating ratio.

These impacts were partially offset by a £31m positive assumption change following a review of the prudence held for UK protection renewal expenses. H1 2015 operating profit also included £7m operating profit from Legal & General France, which was disposed of on 31^st December 2015.

Profit before tax impacted by interest rates

Insurance profit before tax reduced to £46m (H1 2015: £138m), as a result of negative investment variance of £(92)m (H1 2015: £(48)m) following a c.1% reduction in UK government bond yields, which impacted the discount rate used to calculate the reserves for our UK Protection liabilities.

savings

Operational cash generation reduced to £51m (H1 2015: £67m) as we continue to manage the reducing contribution from our declining mature savings business. Net cash generation was £14m lower at £48m (H1 2015: £62m), with new business strain of £3m (H1 2015: £5m) as we reduce the cost base associated with this business.

Operating profit remains strong at £49m (H1 2015 : £55m). The introduction of robotics has increased automation and we continue to enhance our digital offering to provide more flexibility for our customers.

On the 15 January 2016 the Group announced the sale of Suffolk Life to Curtis Banks Group for £45m, which completed on 25^th May 2016. In H1 2016 and 2015 Suffolk Life contributed £nil to operational cash, net cash generation and operating profit.

Platform assets grow

Our Platforms business net flows of £(0.7)bn (H1 2015: £1.1bn). Assets under administration (AUA) increased to  £77.5bn (H1 2015: £74.6bn). 

Whilst our platform pension AUA has grown in H1 2016, we have seen outflows increase mainly through  partial encashment as customers withdraw money for income and other purposes. In Mature Savings, assets were £29.4bn (H1 2015: £34.8bn). Mature Savings net outflows have improved year on year due to  improved retention of our books and in our With-Profits business due to the reducing maturity profile of some products, particularly Endowments.

FREEDOM AND CHOICE

Since the introduction of the Pensions Reform legislation we have seen an increase in the proportion of customers wishing to take their pension pots as cash withdrawals, with approximately 90%, or 27,000 customers, electing to take cash payments. Our average payment size is £11k. This compares to approximately 60% of customers taking cash before the reform legislation was announced. 

LEGAL & GENERAL AMERICA

improved cash generation

Operational cash generation increased by 10% to $88m (H1 2015: $80m). This represents the dividends paid by Legal & General America (LGA) to the Group and reflects the focus of LGA to deliver operational cash generation.

Operating profit was $62m (H1 2015: $61m) in spite of the ongoing low interest rate environment reflecting continued growth in premium revenue. 

Gross premium revenue increased 2% to $601m (H1 2015: $588m) and continues to benefit from strong relationships with the brokerage general agents, (BGAs), who distribute term assurance in the US market. LGA is the 10th largest provider of term life assurance, by annual premium equivalent, in the US and remains the 3rd largest provider through the key distribution channel of BGAs. LGA now has 1.22m policies (H1 2015: 1.18m).

new business focus on margin improvement

New business volumes were $41m (H1 2015: $62m).  LGA continues to focus on increasing margins and sustaining strong cash generation to the Group. New business volumes for H2 2016 are expected to be broadly consistent with H2 2015 of $44m. 

Facilitating US Pension risk transfer (PRT) Business

LGA is important to the expansion of the Group in the US and will continue to provide the regulatory balance sheet, administrative services and payments to annuitants for LGR America and back office support for LGIM America.

borrowings

Legal & General continues to have a strong liquidity position reflecting its requirements for working capital and derivative collateral.  The Group's outstanding core borrowings total £3.1bn (FY 2015: £3.1bn). There is also a further £0.4bn (FY 2015: £0.5bn) of operational borrowings including £0.2bn (FY 2015: £0.6bn) of non-recourse borrowings.

Group debt costs of £86m (H1 2015: £75m) reflect an average cost of debt of 5.4% per annum (H1 2015: 5.1% per annum) on average nominal value of debt balances of £3.2bn (H1 2015: £3.0bn).

taxation - effective tax rate of 19.2%

In H1 2016, the Group's effective tax rate remained slightly below the UK corporation tax rate due to a number of differences between the measurement of accounting profit and taxable profits.

Trading losses within Legal & General Pensions Limited, which previously benefitted both LGR and Insurance, were fully utilised in 2015. 

operational and net CASH GENERATION

The table below is set out in the format of the operational cash generation guidance for 2016 given at the time of the 2015 results announcement. Net cash generation increased by 16%. This includes the full year ordinary dividend of $88m from LGA which was received in Q1 2016.

The revised operational cash generation guidance above, for FY 2016, reflects a higher proportion of cash and cash equivalents assets in the LGC portfolio than anticipated at the time of our FY 2015 results. 

cash generation and earnings

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

SOLVENCY II

As at 30 June 2016 the Group had an estimated Solvency II surplus of £5.3bn over its Solvency capital requirement, corresponding to a Solvency II coverage ratio of 158%.

1. Solvency II position on a proforma basis as at 30 June 2016 and before the accrual of the interim dividend.

When stated on a shareholder basis, excluding the SCR attributable to our With-Profits fund of £651m from both the Group's eligible own funds and the SCR, the Group's coverage ratio increases to 163%.

estimated solvency II new business contribution

Following our decision to discontinue European Embedded Value reporting, we committed to provide the market with a replacement measure of new business profitability under the new Solvency II regime.

The "Solvency II Value Metric" provides a measure of the value created in the business allowing for the run-off of Solvency II capital. The Value Metric essentially follows the principles of the  EEV, but assumes profit emergence based on a Solvency II basis instead of the previous Solvency I Pillar 1 regime.  Other methodologies are unchanged.

Management estimates of the value of new business and the margin as at H1 2016 are shown below:

1.            UK annuity business.

Key assumptions in calculating the Solvency II new business contribution are shown below:

All other assumptions and methodologies that would have a material impact on the margin for these contracts are unchanged from end 2015 other than the cost of currency hedging which has been updated to reflect current market conditions and hedging activity in light of Solvency II.

economic capital

Economic capital is the amount of capital that the Board believes the Group needs to hold, over and above its liabilities, in order to meet the Group's strategic objectives. Our Economic Capital model is not subject to review or approval by the Prudential Regulatory Authority (PRA).

As at 30 June 2016  Legal & General Group had an economic capital surplus of £8.1bn (FY 2015: £7.6bn), corresponding to an economic capital coverage ratio of 235% (FY 2015: 230%).

Eligible own funds increased by £0.5bn to £14.0bn (FY 2015: £13.5bn). The economic capital requirement was £5.9bn (FY 2015: £5.9bn).

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.

ENQUIRIES

Investors:

Laura Doyle                   Head of Investor Relations                                            020 3124 2088

Sujee Rajah                   Investor Relations Manager                                          020 3124 2047

Media:

Richard King                  Head of Group Corporate Communications                    020 3122 095

Doug Campbell              Tulchan Communications                                             020 7353 4200

Notes

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

A presentation to analysts and fund managers will take place at 10.00am UK time today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of the presentation which can be accessed at  http://www.legalandgeneralgroup.com/investors/results2016.html A replay will be available on this website later today.