Final Results

RNS Number : 4171P

Legal & General Group Plc

25 March 2009

 



Stock Exchange Release  

25 March 2009

Management action ensuring continued strength of Legal & General in testing environment

Balance sheet

• IGD surplus £1.9bn at 31 December 2008 before payment of final dividend (£1.8bn after final dividend of £120m)
     IGD capital resources of £4.4bn after dividend. Coverage ratio of 169% of required capital
     Estimated IGD surplus £1.5bn (after final dividend) at 23 March 2009
     Robust against stressed conditions

• Asset portfolio - highly diversified, granular risk management
     99% of rated bonds investment grade
     Reserves for non profit annuity credit defaults under IFRS increased to £1.2bn

Performance and cash flow

• IFRS operating loss of £189m (2007: profit £658m)
     Reflects increased credit default reserving 

• Strong cash generation of £654m (2007: £580m)
     Net cash of £320m after new business reinvestment of £334m
     Full year recommended dividend cost £239m (2007: £369m)

• Recommending reduced final dividend of 2.05p per share (2007: 4.10p)

Strategy

• Cash generation and balance sheet strength focus in 2009
     Targeting net cash generation after new business strain in excess of £450m in 2009
     Continued focus on cost management, balance sheet de-risking and low capital strain products

Group Chief Executive, Tim Breedon, said:

'Today's dividend recommendation balances our strong operational cash generation and the need to promote balance sheet resilience. We took action in 2008 to improve business cashflow and strengthen capital by substantially increasing our credit default reserves, reducing our equity exposure, and managing our cost base. Our £1.8bn IGD surplus after dividend is strong and resilient to further stress scenarios.

'Balance sheet strength remains our priority in 2009 and will be underpinned by further improvement in the cash profile of our businesses and management of costs. We will be selective about sales growth and are reducing new business capital strain through product design and pricing action. Today's dividend decision reflects our realism about the current environment, but also our confidence in the business model and underlying strength of the Company to trade through current economic uncertainty and emerge stronger after the recession.'

Financial highlights £m	2008	2007
IFRS operating (loss)/profit	(189)	658
IFRS (loss)/profit from ordinary activities after tax	(1,130)	718
IFRS shareholders' equity per share (p)	61.2	86.5
Recommended full year dividend (p)	4.06	5.97
PVNBP	9,429	9,807
Worldwide contribution from new business	297	359
EEV operating profit	870	848
EEV (loss)/profit from ordinary activities after tax	(973)	1,153
EEV shareholders' equity per share (p)	111.2	129.1

All references to IGD amounts are based on draft unaudited regulatory returns

Group Chief Executive Statement

Legal & General has experienced a decrease in IGD capital surplus to £1.8bn (post dividend) and sharply reduced IFRS profits largely as a result of investment market weakness. We have also increased non profit annuity credit default provisions to £1.2bn and responded robustly to the changing economic and market environment by de-risking across the balance sheet. These prudent measures have had a negative impact on reported business margins and profits - but they represent our realistic response to the current economic circumstances. Our decision to recommend a reduced final dividend for 2008 reflects our view that, while the business remains strongly cash generative, capital resilience must remain our immediate priority.

Capital strength is at a premium in current markets. We believe that our IGD capital resources of £4.4bn, including a surplus of £1.8bn after payment of the final dividend and a coverage ratio of 169%, represent a solid capital base for a business of our size, and with our risk profile. This is supported by our comprehensive stress testing, which when coupled with available management actions indicates our balance sheet to be resilient to further shocks across a variety of asset classes. 

It is our intention to build on the actions already taken and to consolidate balance sheet strength further in the interests of our shareholders, business partners and customers. We have already substantially reduced shareholders' equity exposure over the last year, selling over £1bn of equities and investing the proceeds in cash or other liquid assets. We have also put in place increased hedging for the equity component of our With-profits fund. 

Exposure to fixed income markets has come into greater focus with the widening of credit spreads since the banking crisis in the autumn. Our bond portfolio is of high quality and well-diversified, but we have reflected heightened short term risks by increasing provisions for non profit annuity credit defaults to £1.2bn. This represents a historically high rate of provisioning, above levels needed to cover the worst default levels since the Great Depression. Today, we are disclosing the analysis of our portfolio at a granular level, and outlining our provisioning methodology. In 2009 to date, we have experienced no defaults from any securities held within this portfolio.

Concerns about risk also influence our dividend recommendation. We believe the interests of shareholders are best served by prioritising capital strength, de-risking and cashflow generation while ensuring the future prosperity of the Group. This will put the Group on a sound footing ahead of emergence from the economic recession. Shareholders should expect continued caution in capital and cashflow management while markets remain volatile.

Sales held up well in 2008, even in the latter part of the year after the impact of economic slowdown and recession became apparent in the UK. We have continued to diversify protection product and sales, in particular reducing dependence on the mortgage-related individual protection sales and we are performing very strongly in group protection. In the annuity market we have been very selective in the business we have written and ensured that prices fully reflect the risks assumed. We made progress in our Savings business, albeit at a slower pace than we would have liked. Investment management performed strongly, consistent with performance in prior periods, reinforcing our position as the UK's leading pension fund investment manager. 

These businesses collectively generated £654m of cash for the Group. Of this, £334m was reinvested in new business, and £239m has been allocated for dividend payments for the year. While this is a strong cash position and a realistic approach to funding the dividend, I am convinced we can substantially improve net cash generation during 2009. We will do so by writing business more selectively, focusing on lower strain products and by reducing costs, particularly in Savings. Our target for the coming year is to reduce new business strain and deliver positive operational cash generation (after new business strain) in excess of £450m.

In today's current dislocated markets, the board feels it is prudent to prioritise capital strength; hence the dividend recommendation today. From this point going forward, subject to satisfaction with the strength and resilience of our capital position, we will be looking to grow the dividend in line with expected medium term growth in operational cash flow.

We believe we have a fundamentally sound strategy, a strong track record, and a good opportunity to generate additional value for shareholders by taking the right decisions around risk mitigation and business development during 2009. 

Business overview

Headline financial results

The IFRS operating result was a loss before tax of £189m (2007: profit £658m) which reflected the £650m cost of provision for increased short term non profit annuity credit default assumptions as announced in February. Total UK non profit annuity credit default reserves now stand at £1.2bn. IFRS result before tax was negative £1,491m (2007: profit £883m).

The EEV operating profit of £870m (2007: £848m) was reduced by £137m for in-force assumption changes and variances (2007: reduced by £162m). The EEV loss before tax of £1,381m (2007: profit £1,171m) included the impact of provisions for increased short term credit default reserving. In 2008, on a best estimate basis, Legal & General Pensions Limited has reserved an additional £313m (before discounting) to allow for increased short term credit default reserves over a four year period. Economic assumption changes include £272m to reflect the present value and cost of capital of the in-force element of the additional reserve.

Operational cash generation

Operational cash generation £m	2008	2007
Risk(1)	379	270
Savings(1)	138	153
Investment management (2)	115	100
Group capital and financing(3)	22	57
	654	580

Note:
1 Risk and Savings operational cash generation reflects the expected release from inforce for non profit business, the shareholders' share of bonuses on With-profits business and net IFRS operating profit on other businesses.
2.Investment management operational cash generation includes net cash profit.
3. Group capital and financing operational cash generation includes investment income on shareholder fund assets, less Group interest payable and other corporate expenses.

Risk 

Our Risk business delivered higher sales (APE sales up 14%) and increased operational cash generation.

We made significant progress in building our market leading group protection franchise - we launched new underwriting and administration platforms that have strengthened our reputation and market position. We are now a leader in this sector with defensible competitive advantage and a cash generative book of business.

Individual protection, despite obviously challenging conditions in the housing market, maintained high application volumes and saw new business decline only 13%. We are the pre-eminent business in this market with enviable distribution strengths through our business partners, IFAs and one of the UK's largest mortgage clubs.

We had a record year in annuity sales - demonstrating our strategic flexibility to participate selectively in the huge volumes of business in the open pension schemes market as well as the traditional BPA and individual annuity markets. We remain measured in our approach to this market, but we are pleased with the sales performance of the business last year.

Our Risk business made a contribution to operational cash generation of £379m (2007: £270m) reflecting the growing, mature, cash generative profile of this business.  Savings 

Headline APE sales were 2% lower in 2008. However, we have made meaningful progress towards a better mix of business, and been successful in a number of key products. Our modern, capital light flexible SIPP products, for example, grew 100%, and constitute 58% of new non profit individual pension sales. Retail investments also performed strongly, up 42%, benefiting from a broader product offering, including new active retail funds and Nationwide Building Society distribution coming on stream. 

Unit linked bonds had a tough year - sales dropped 48% in line with the industry. The step reduction in industry volumes - driven by fiscal changes in 2008 - highlights the benefits of a diversified strategy. We are active in the International bond market, as well as other savings products.

The non profit Savings business delivered £61m (2007: £79m) of operational cash generation, in addition to which the With-profits business transferred £77m (2007: £74m) in respect of the shareholders' share of bonuses.

Investment management

Investment management had another very strong year, with gross new fund mandates of £33.1bn (2007: £54.4bn). Of this, LGIM gross new fund mandates were £30.9bn and net new funds of £10.1bn. Assets under management at the end of 2008 were £264bn (2007: £297bn) - a very strong performance in falling markets. 

We are the leading manager of UK pension fund assets and highly cash generative - operational cash generation was £115m (2007: £100m) despite lower assets under management.

 Outlook

We expect difficult economic and market conditions to continue. Going forward through 2009 we are taking a prudent approach to new business - ensuring that we balance our appetite with cashflow growth and balance sheet consolidation. We will be increasingly selective of the new business we write - targeting products with low capital strain, shorter payback periods and less risk to capital. 

Our direction of travel will not change. We have been moving our Savings business successfully towards more modern, flexible products. In annuities we continue to believe that long term returns for shareholders are excellent. Market demand clearly outstrips supply and we are able to choose the business we want to write. Protection remains a strong market leader and we will continue to drive diversification and risk and expense management. Investment management is seeing increasing interest in our active fixed income offering complementing the established index-tracking business. The UK economy will recover - the business will be well positioned to take advantage when that time comes.

Balance sheet management 

The capital position of Legal & General Group Plc and its subsidiaries remains appropriate for its size and risk profile, being sufficient to withstand further stress scenarios. This is despite investment market weakness having significantly reduced the headline capital resources of the Group. 

Capital resources

We measure and monitor capital on regulatory and economic bases. During 2008 the market has increasingly focused on the Insurance Groups Directive ('IGD') regulatory capital surplus. At the end of 2008, our IGD capital resources were £4.4bn, which covered the IGD capital requirements of £2.6bn with surplus of £1.8bn and a coverage ratio of 169% (2007: 198%). All IGD figures are stated after the deduction of a final dividend, the cost of which is £120m (2007: £248m). The structure of our capital resources is as follows:

IGD capital resources £bn	2008	2007
Core Tier 1	3.9	7.6
Innovative Tier 1	0.6	0.6
Upper Tier 2	0.4	0.4
Lower Tier 2	0.6	0.4
Deductions	(1.1)	(0.7)
	4.4	8.3
Capital resources requirement	2.6	4.2
Surplus	1.8	4.1

This surplus position is lower than at the start of the year (2007 IGD surplus: £4.1bn), primarily reflecting weak investment markets and our decision to strengthen non profit annuity credit default reserves to £1.2bn. Movements in IGD surplus over the year are detailed in the following table.

31 December 2007 IGD surplus £bn	4.1
Equity market movements	(0.9)
Share buy back programme	(0.5)
Society long term fund impact(1)	(0.2)
Impact of acquisitions	(0.3)
Dividends paid and proposed	(0.2)
Other items	(0.2)
31 December 2008 IGD surplus £bn (estimate)	1.8

Note: (1) The Society long term fund capital requirement of £2.1bn is met by £1.9bn of capital resources in the long term fund and £0.2bn of other Society Shareholder Capital.

Our IGD surplus can absorb further stress scenarios in addition to the year end position - further details will be provided in the presentation materials.

With-profits fund

We manage our With-profits business with the objective of operating within its own capital resources in further stress scenarios. There is a wide range of management actions available to us which gives us confidence that this objective remains achievable.

The With-profits Estate at the end of 2008 was £641m (2007: £1,047m). The corresponding capital requirement, the Risk Capital Margin ('RCM'), was £373m (2007: £262m). This requirement remained more onerous than the FSA's Pillar 1 Peak 1 requirement by £217m (2007: £1,978m).

Liquidity

Legal & General has a limited appetite for liquidity risk and maintains at Group level sufficient liquid assets and standby facilities to meet a prudent estimate of the Group's net cash outflows over a period of two years, as identified through annual planning processes.

The liquidity position across our operational business units is very strong. On average during 2008 we maintained a daily average cash balance in excess of £1bn of overnight cash deposits and significant holdings of liquid assets such as Gilts.

Our Group liquidity position is also strong. We have a circa £1bn undrawn committed syndicated credit facility which matures in December 2012. We also have access to liquid funds under our US$2bn Commercial Paper programme. The Group has no outstanding bonds that mature before 2015. There are no restrictive covenants and no credit rating or share price triggers in respect of our debt or liquidity position.

Asset portfolio 

There are new disclosures in section 6 of this results pack, some highlights of which are included in the following table.

Shareholders have exposure to 10% of total assets under management, or £28bn. The portfolio is of high quality. In the first period of 2009 there have been no defaults on our bond portfolio. In the following table we have separately identified assets within Legal & General Pensions Limited ('LGPL') since this is where we write our UK non profit annuity business which represents the majority of our fixed interest exposure:

Asset class £bn	LGPL	Total
Equities	-	1.4
Property	-	0.2
Bonds	17.1	21.4
Derivative assets	1.3	2.3
Cash (including cash equivalents)	0.3	3.0
	18.7	28.3

Equity investments

Shareholders' exposure to UK and overseas equities was £1.4bn at 31 December 2008. 

The Group has disposed of £1.1bn of equities, most in 2008, and some in the first quarter of 2009. The majority of these proceeds are currently being held in cash and short term liquid instruments.

Bond investments

The following table expands on the credit structure of bond investments to which shareholders are exposed:

Rating band  £bn	LGPL	Total
AAA	2.6	4.6
AA	1.9	2.3
A	7.1	8.2
BBB	3.8	4.4
BB or below	01	0.2
Not rated	1.6	1.7
	17.1	21.4

The credit quality of our portfolio of bonds is good, with 99% of the rated bonds in investment grade credit.

We have increased the sector and geographic diversification of our annuity portfolio in the last two years. Key to this was the separation of our decision-making for liability cashflow matching and return generating strategies. This gives us flexibility to access a wider pool of globally diversified securities while ensuring cashflow matching through the use of derivatives. We have no material exposure to currency or overseas interest rate risks. 55% of securities are now held outside the UK, compared to 33% two years ago. Of this 28% are held in North America, and 23% in Europe.

A full sector analysis of our bond exposures is given in the schedules to these results.

In 2008 we saw defaults on our UK annuity portfolio of 0.3% - in line with our long term IFRS reserving assumption. This demonstrated significantly better experience than either UK or global corporate bond indices.

Banks securities

As a result of our decision to further diversify the portfolio, overall exposure to UK banks reduced in 2008. We are now significantly underweight in banks in comparison to both global and local market index weightings. There has been particular market interest in recent months in the non-Senior tierings of bank securities exposures - details are summarised here.

Tiering £m	UK	North America	Europe	Other	Total
Tier 2 lower	760	668	255	71	1,754
Tier 2 upper	474	3	142	9	628
Tier 1 (including preference stock)	448	102	88	12	650
Other subordinated	10	18	-	-	28
	1,692	791	485	92	3,060

Collateralised Debt Obligations ('CDO')

We have separately identified our CDO investments, which have previously been classified within ABS. Of the total £1,004m of CDO investments, £844m relate to internally managed CDOs which are super-senior tranches of bespoke structures constructed and managed by Legal & General to provide enhanced yield with significant protection against default. The bespoke CDOs were previously classified under an internal rating basis. We believe it is appropriate to identify these internally managed assets separately, and they are now reported within the not rated category. The underlying credit exposures within our CDOs are investment grade. We estimate that, given normal levels of recoveries, it would take on average more than 40% of the underlying portfolio to default over a ten year period for any loss to accrue. 

Asset backed securities ('ABS')

Within our bond portfolio, ABS investments at the end of 2008 stood at a market value of £3.4bn. ABS holdings are analysed in detail in the schedules to these results. Our portfolio of ABS investments remains defensive, with the majority of the structured finance exposure to either UK based infrastructure or secured bonds. These are high quality assets that were selected for their long duration and risk diversification.

There are £1.3bn of traditionally-categorised ABS investments. This includes prime RMBS, CMBS, student, auto and credit card loans. The average rating of these classes is AAA.

We have just £30m of sub-prime RMBS, of which 90% is of AAA quality.

Further detail is included in note 6.03 to this release.

IFRS and EEV assumptions

All assumptions under IFRS and EEV reporting are reviewed fully at each year end. Each review will affect the relative strength of the assumptions. In 2008 the overall impact of our review was to increase the strength of our assumptions to reflect the current dislocated market conditions. We have used regulatory Pillar 1 assumptions in IFRS and best estimate assumptions in EEV.

IFRS default assumptions 

As announced in February 2009, we significantly increased the conservatism of our IFRS and statutory reserving assumptions for credit defaults in our UK non profit annuities business as at 31 December 2008. The aggregate effect of this reserve strengthening was to more than double our default reserves to £1.2bn. This increase represents an additional 100bp per annum for a four year period in addition to our long term default assumption of 30bp (after 15bp of recoveries). The same approach has been used for setting default assumptions in our With-profits fund.

The basis of our new assumptions followed a thorough sector-by-sector review of our portfolio, and default experiences from the 1930s and subsequent recessions. In reviewing these assumptions we cross-referenced a range of methodologies. Each approach confirmed the appropriateness of our overall assumptions. We believe that these assumptions allow for a continuation of the current challenging economic conditions. Performance of our portfolio against these stronger assumptions will be closely monitored over a period of time. It is anticipated that reserves will be retained until such time as the Board considers short term default risk to have fallen materially. This position will be reviewed on an ongoing basis.

EEV assumptions

In 2008, on a best estimate basis, Legal & General Pensions Limited has reserved an additional £313m to allow for increased short term credit default reserves over a four year period. Economic assumption changes include £272m to reflect the present value and cost of capital of the in-force element of the additional reserve. 

At year end 2008 the UK risk discount rate ('RDR') has been increased to 8.3% from 7.5% at the end of 2007, resulting in a £361m charge to economic assumption changes. This increase in the RDR resulted from management's decision to increase the risk margin in the RDR from 3.0% to 4.5% (including a 0.5% increase as a result of a higher equity risk premium) to reflect the current dislocated market conditions. In isolation, this latter change has reduced the Group's new business margin by 1.5%, before taking into account the favourable impact of lower risk free rates.

Enquiries

Investors:

Jonathan Maddock    Head of Investor Relations           020 3124 2150
Damian O'Reilly          Investor Relations Manager          020 3124 2151

Ching-Yee Chan        Investor Relations Co-ordinator    020 3124 2345

Media:
John Godfrey           Group Communications Director    020 3124 2090

Richard King             Head of Media Relations                020 3124 2095
James Bradley         Tulchan Communications                020 7353 4200

Mal Patel                   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://investor.legalandgeneral.com/investors/results.cfm.

A presentation to analysts and fund managers will take place at 09.30 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/investors/results.cfm. A replay will be available on this website later today. 

There will be a live listen only teleconference link to the presentation.  UK investors should dial 01452 546 750 and overseas investors should dial [phone]. The conference ID number is 88896264.

Basis of preparation

The European Union requires all listed companies to prepare their consolidated financial statements using standards issued by the International Accounting Standards Board. The Group's statutory results have therefore been reported on an International Financial Reporting Standards basis. The Group's directors continue to believe that the supplementary accounts prepared using European Embedded Value principles provide shareholders with a good understanding of the value which has been generated by the Group.  

The following financial statements were approved by a sub-committee of the Board on 24 March 2008 and constitute non statutory accounts within the meaning of Section 240 of the Companies Act 1985. The Group's financial statements for 2007 include the auditors' unqualified report and do not contain a statement under either Sections 237(2) or 237(3) of the Companies Act 1985. 

Financial calendar 2009:

Event	Date
Ex dividend date	15 April 2009
Q1 2009 Interim management statement	23 April 2009
Annual General Meeting at the Institution of Engineering and Technology in London	27 May 2009
Dividend payment date of 2008 final dividend	1 June 2009
Half year 2009 results	4 August 2009

A Dividend Re-investment Plan is available to shareholders. 

Forward-looking statements

This document may contain certain forward-looking statements with respect to certain of Legal & General Group Plc's (and its subsidiary undertakings') plans and its (and their) current goals and expectations relating to future financial condition, performance and results. By their nature forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Legal & General Group'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 authorities, the impact of competition and the policies and actions of governmental and regulatory authorities, the timing impact and other uncertainties of future acquisition or combinations within relevant industries. As a result, Legal & General Group's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in Legal & General Group's forward-looking statements and persons reading this announcement should not place undue 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 document or any other forward-looking statement it may make.

Business review

Financial highlights

	2008	2007
IFRS basis results	£m	£m
Operating (loss)/profit	(189)	658
(Loss)/profit from continuing operations before tax attributable to equity holders	(1,491)	883
Diluted earnings per share based on operating profit after tax (pence)	(2.18)	7.13
Shareholders' equity	3,588	5,446
Shareholders' equity per share (pence)	61.2	86.5

IFRS operating result before tax has been reduced in 2008 by the £650m cost of provision for increased short term credit default assumptions as announced in February 2009. Total UK non profit credit default reserves now stand at £1.2bn. Total non profit experience variances, assumption changes and non-cash items were negative £564m net of tax (2007: positive £72m). IFRS loss before tax reflects mark to market investment variances of negative £1,239m (2007: negative £90m).

	2008	2007 (restated)(1)
EEV basis results	£m	£m
Operating profit	870	848
(Loss)/profit from continuing operations before tax attributable to equity holders	(1,381)	1,171
Diluted earnings per share based on operating profit after tax (pence)	10.62	9.02
Shareholders' equity	6,521	8,128
Shareholders' equity per share (pence)	111.2	129.1

Notes:

1: Legal & General Assurance (Pensions Management) Limited ('PMC') is no longer classified as covered business. As a result it is now reported on an IFRS basis within the EEV results and prior year figures have been restated.

EEV operating profit has been reduced by £137m (2007: £162m) for in-force assumption changes and variances. The EEV loss before tax includes the impact of provisions for increased short term credit default reserving on a best estimate basis of £313m before discounting.

	2008	2007
New business	£m	£m
Worldwide total PVNBP	9,429	9,807
Worldwide contribution from new business	297	359
New institutional investment management fund mandates	33,091	54,431

New business contribution was reduced as a result of a higher cost of capital resulting from lower equity holdings in assets backing the solvency margin, and by other negative economic assumption changes.

There have been a number of revisions to our accounting policies for year end 2008 including segmental reporting, exclusion of our pensions management business from covered business and re-presentation of the internal contingent loan. These are detailed later in this release.

IFRS basis financial results

In November 2008 we set out the key metrics by which we manage and monitor our businesses. This puts greater emphasis on IFRS profitability for the Group and for most of our product areas. We have today, for the first time, segmented the profitability between our key businesses giving greater transparency on the financial performance of each. There is no change to operating profit, profit before tax or shareholders' equity as a result. Operating profit on the previous segmentation is provided later in this release.

Financial highlights £m	2008	2007(1)
Risk	(603)	104
Savings	66	112
Investment management	165	143
International	59	86
Group capital and financing	124	213
Operating (loss)/profit	(189)	658
Variation from longer term investment return	(1,239)	(90)
Release of 1996 sub-fund and other items	(63)	315
(Loss)/profit from ordinary activities before tax attributable to equity holders	(1,491)	883
Tax credit/(expense) attributable to equity holders	361	(165)
(Loss)/profit from ordinary activities after tax	(1,130)	718
Shareholders' equity	3,588	5,446
Shareholders' equity per share (p)	61.2	86.5

Notes:

1: Reclassified to reflect IFRS 8 segmental analysis

The worldwide IFRS operating result was a loss of £189m, compared to a profit of £658m in 2007. The result for 2008 includes aggregate non profit assumption changes, experience variances and non-cash items of negative £564m (net of tax) compared to positive £72m (net of tax) in 2007. The most significant effect in 2008 was the £650m (pre tax) impact of increasing non profit credit default provisions to £1.2bn, as announced in February 2009. This is reported through our Risk business segment which includes the assets backing our UK non profit annuity business. The operating result for our Risk business was a loss of £603m (2007: profit of £104m) reflecting this assumption change. Savings business operating result was a profit of £66m (2007: profit of £112m).

Risk and Savings

Financial highlights £m	2008	2007(1)
Analysis of UK Risk and Savings operating result
Risk business operating result	(603)	104
Savings business operating result	66	112
	(537)	216
Further analysed as:
- Expected capital release on existing business	453	406
- New business strain	(334)	(344)
- Other non profit business contribution	(564)	72
- Tax gross-up	(177)	57
- Non profit business operating (loss)/profit	(622)	191
- With-profits	107	106
- General Insurance	(2)	(67)
- Core retail investments	-	12
- Other(2)	(20)	(26)
UK Risk and Savings business result	(537)	216

Notes:

1: Reclassified to reflect IFRS 8 segmental analysis

2: Includes result for Nationwide Life and Suffolk Life

The expected release from the in-force non profit business was £453m (2007: £406m), reflecting growth in the UK non profit business in recent years. We expect the release in 2009 to be up to 10% higher. New business strain was £334m (2007: £344m) modestly lower, in line with new business volumes and changes in mix.

Other non profit business contributions - including experience variances, assumption changes and non-cash items were negative £564m in 2008 (2007: positive £72m).

• Experience variance: negative £315m (2007: positive £115m) included £296m of negative investment variances. More than half of this loss arose from the deferral of tax relief on expenses as a result of movements in investment markets over the year and is fully offset by a movement in the deferred tax element of non-cash items noted below. The remainder relates mainly to a strengthening of the valuation bases in annuities due to lower gilt yields.
  
  Project and development costs were £95m in 2008 (2007: £44m), reflecting internal systems development and technology developments in protection and corporate pensions.

• Valuation assumption changes: negative £660m (2007: negative £137m) as a result of increased credit default assumptions in our non profit annuity business of £650m pre-tax, the tax effect being reflected in non-cash items noted below.

• Non-cash movements: positive £380m (2007: positive £61m) includes tax offset effects of the above two items and movements in deferred acquisition costs, deferred income liabilities and other items.

• Other movements were almost unchanged at positive £31m (2007: positive £33m).

After grossing up for tax, the non profit business contribution was negative £622m (2007: positive £191m).

The shareholders' share of With-profits bonuses was stable at £107m (2007: £106m), with higher maturities being offset by the effect of reduced bonus rates during the year.

General insurance gross written premiums grew by 4% (excluding healthcare business) to £296m (2007: £285m) despite difficult market conditions and the resultant impact on mortgage related sales. We have reported an operating loss in 2008 of £2m (2007: negative £67m), the reduced loss reflecting more benign weather conditions following flooding in 2007. 

Investment management

The Investment management business delivered an increase in IFRS operating profit to £165m (2007: £143m), including the profits arising from the provision of services on internal assets of £35m (2007: £23m). Underlying profits grew 8% despite a significant decline in investment markets.

IFRS operating profit £m	2008	2007(1)
Managed pension funds	117	103
Private equity	(1)	-
Property	4	6
Other income	52	38
LGIM total	172	147
Institutional unit trusts	(7)	(4)
Investment management total	165	143
Investment management new business £bn
Pooled funds	26.8	49.5
Segregated funds	0.8	2.6
Total managed funds	27.6	52.1
Other funds	5.5	2.3
Total	33.1	54.4

Notes:

1:In 2007 Investment Management included £12m of operating profit from our core retail investment business, which is now included in the Savings business segment.

Legal & General Investment Management ('LGIM') had another strong year, with gross new fund mandates of £30.9bn (excluding institutional unit trusts) and net new funds of £10.1bn (2007: £36.5bn). Lower headline sales relate to the exceptional £20.3bn of funds transferred in 2007 from clients of Hermes. Persistency remained strong, with LGIM retaining 90% of client money.

The scale and efficiency of LGIM's operating model is reflected in a cash contribution to Group of £115m (2007: £100m) being cash profits after tax.

Aggregate funds under management of £264bn were lower at the end of the year reflecting strong net sales, offset by market movements. LGIM's total fee to fund ratio of 10.6bps is modestly lower (2007: 10.9bps), due to changes in business mix. LGIM's cost income ratio was 49% (2007: 46%). The 2008 ratio is marginally higher due to revenue falls as a result of global market downturn.

Our institutional unit trust business reported a loss before tax in 2008 reflecting in part the effect of lower fee income and costs associated with business acquired in the year.

International

IFRS operating profit £m	2008	2007
USA	39	59
Netherlands	6	11
France	14	16
	59	86

Operating profit in our USA business reduced by 40% to $71m (2007: $119m). This reflects adverse mortality experience of $19m (2007: positive $3m), representing a small increase in the number of deaths. 

In the Netherlands, regulatory and market conditions remain challenging. Operating profit of €8m compared to €17m in 2007. In 2008 we have made a prudent provision of €9m in respect of ongoing industry-wide regulatory matters.

In France, operating profit was €18m (2007: €23m), with the reduction in profitability largely reflecting lower income from unit linked contracts as a result of lower investment markets.

Group capital and financing

IFRS operating profit £m	2008	2007
Investment return	351	387
Interest expense	(198)	(179)
Investment expenses	(5)	(5)
Unallocated corporate expenses	(9)	(11)
Defined benefits pension scheme	(15)	21
Total	124	213

The Group capital and financing operating result largely reflects smoothed investment returns on shareholder assets in our UK Risk and Savings businesses, assets held at Group and Group interest charges. Investment return decreased to £351m (2007: £387m). Investment returns are calculated on the basis of a smoothed investment return (aggregate rate 2008: 7%; 2007: 7%) on a quarterly average balance of assets of £5.4bn in 2008 (2007: £5.9bn). The balance of assets at the end of the period was £4.8bn.

Interest expense increased to £198m (2007: £179m), reflecting a full year's interest charge on our Tier 1 debt issued in May 2007.

IFRS profit before tax

Below the operating line, the negative impact of investment markets was seen in a mark to market variance on longer term investment returns of negative £1,239m (2007: negative £90m). This relates primarily to underperformance relative to assumptions on equity and property investment (equities: negative 31% compared to an assumed 7.5%; property: negative 27% compared to an assumed 6.5%) and reductions in the market value of bond investments in the shareholders' funds.

The post tax result from ordinary activities of a loss of £1,130m fully reflects this mark to market on investment positions (2007: profit of £718m). Allowing for this and £523m of shares repurchased in the year, shareholders' equity reduced from £5.4bn to £3.6bn during the year.

Additional analysis of IFRS operating result

Non profit strain and release by major product class

2008 key financials £m	Protection	Annuities	Pensions	Unit linked bonds	Total non profit
Expected release from in-force	219	157	30	47	453
New business strain	(124)	(49)	(83)	(78)	(334)
Sub-total	95	108	(53)	(31)	119
Experience variance					(315)
Assumption changes and other					(249)
Tax gross-up					(177)
IFRS operating result					(622)

Note:

Includes analysis of results for Legal & General Assurance Society Limited and Legal & General Pensions Limited.

2008 IRR and payback period	Protection	Annuities	Pensions	Unit linked bonds	Total non profit
IRR on new non profit business (%)	14	>15	7	6	13
Payback period (years)	5	6	12	10	7

Note:

Payback period is calculated on an undiscounted basis.

Analysis of IFRS result on previous segmentation

We have continued to provide IFRS operating profit information on the same basis as previously reported, highlights of which are included in the following table. Further detail is included in the appendices to this release.

Financial highlights £m	2008	2007
UK life and pensions	(291)	557
International life and pensions	63	86
Investment management	165	155
General insurance	(2)	(67)
Other operational income	(124)	(73)
Operating (loss)/profit before tax	(189)	658

EEV Basis Financial Results

Financial highlights	PVNBP (£m)		Margin (%)		Contribution (£m)
	2008	2007(1)	2008	2007(1)	2008	2007(1)
Contribution from new business
Protection	1,005	1,161	6.2	9.3	62	108
Annuities	2,806	2,045	7.4	9.1	209	187
Unit linked bonds	1,306	2,512	(1.0)	0.8	(13)	21
Pensions - Stakeholder and other non profit	2,183	1,674	(0.4)	(0.8)	(8)	(14)
With-profits savings	1,233	1,500	1.2	1.3	15	19
UK (Risk and Savings)	8,533	8,892	3.1	3.6	265	321
International	896	915	3.6	4.1	32	38
Worldwide total	9,429	9,807	3.1	3.7	297	359
Contribution from in-force business - expected return(2)					470	394
UK business in-force variances and assumption changes
- Mortality/longevity/morbidity					(22)	(175)
- Persistency					(126)	(65)
- Expenses					26	(62)
- Other					34	135
International in-force variances and assumption changes					(49)	5
Total in-force variances and assumption changes					(137)	(162)
Development costs					(51)	(44)
Contribution from shareholder net worth(2)					273	309
Operating profit
Risk					439	219
Savings					50	146
Investment management					130	120
International					100	136
Group capital and financing					151	227
Operating profit					870	848
Variation from longer term investment return					(1,579)	116
Effect of economic assumption changes					(609)	52
(Loss)/profit from ordinary activities after tax					(973)	1,153
Diluted earnings per share based on operating profit after tax (pence)					10.62	9.02
Shareholders' equity					6,521	8,128
Shareholders' equity per share (pence)					111.2	129.1

Note:

• Legal & General Assurance (Pensions Management) Limited ('PMC') is no longer classified as covered business. As a result it is now reported on an IFRS basis within the EEV results and prior year figures have been restated.

• The treatment of our internal contingent loan has been changed. Its value and unwind of assumptions are now accounted for as part of the UK in-force results, previously having been included as part of shareholder net worth.

Response to current market conditions

Risk discount rate ('RDR')

• At year end 2008 the UK RDR has been increased to 8.3% from 7.5% at the end of 2007, resulting in a £361m charge to economic assumption changes.

• This increase in the RDR resulted from management's decision to increase the risk margin in the RDR from 3.0% to 4.5% (including an increase of 0.5% as a result of a higher equity risk premium) to reflect the current dislocated market conditions. In isolation, this change has reduced the Group new business margin by 1.5%, before taking into account the favourable impact of lower risk free rates.

Short term credit default reserving

• In 2008, on a best estimate basis, Legal & General Pensions Limited has reserved an additional £313m to allow for short term credit default reserves over a four year period. Economic assumption changes include £272m to reflect the present value and cost of capital of the in-force element of the additional reserve.

Cost of capital

• As a result of changes in the portfolio of backing assets, which now have a lower equity content, the cost of capital on UK non profit new business has increased by £24m.

EEV basis financial results

Worldwide PVNBP reduced by 4% to £9,429m (2007: £9,807m). This reflects a decrease of 4% in the UK to £8,533m (2007: £8,892m), and a 2% reduction in our International businesses. Worldwide new business margin of 3.1% was lower compared to 3.7% in 2007, reflecting the items referred to above.

Our UK new business margin was 3.1% (2007: 3.6%):

• Protection: margin of 6.2% (2007: 9.3%). This reduction was largely due to the items referred to above. Pricing remained competitive throughout the year, but this was partly offset by better in-force expenses in our individual protection business and favourable claims experience in group protection. The IRR on new protection business was 14%, with a payback period of 5 years. Underlying new business margins improved in the second half of the year.

• Annuities: margin of 7.4% (2007: 9.1%). The reduction was again due to the items referred to above, which offset pricing conditions which improved during the year. The IRR on new business remained in excess of 15%, with a payback period of 6 years. 

• Unit linked bonds: margin of negative 1.0% (2007: positive 0.8%). Reduced margins largely reflected the 48% reduction in volumes in the year. This increased unit expenses despite ongoing cost management activity. In addition the full year margins reflected increased lapse experience. The IRR on new business was 6%, with a payback period of 10 years.

• Non profit pensions: margin of negative 0.4% (2007: negative 0.8%). Excluding the items referred to above, non profit pensions business would have broken even in the second half of the year. The mix of business continues to improve and associated in-force expenses also had a positive effect. IRR on new business was 7%, with a 12 year payback period.

• With-profits: margin of 1.2% (2007: 1.3%).

As a result of these movements, UK new business contribution decreased to £265m (2007: £321m). New business contribution from our International businesses, at £32m, a similar result in H2 compared to H1 2008 (£16m), with a margin of 3.6% compared to 4.1% in 2007. International new business margin also reflected the effect of the higher risk discount rate referred to above.

The expected return from in-force business increased to £470m (2007: £394m). This was due to the unwind of a slightly lower discount rate (7.5% compared to 7.6%) on a higher opening embedded value.

The contribution from shareholder net worth of £273m decreased from £309m as contribution is based on the average asset value which declined during 2008. 

Experience variances and assumption changes in our UK Risk and Savings businesses of negative £88m (2007: negative £167m) included:

• Mortality/morbidity/longevity: negative £22m (2007: negative £175m). We saw positive experience variances of £27m in the year, predominantly from protection. In our annuity business we adjusted our assumptions with a negative effect of £49m - we use a three year rolling average in assessing current mortality rates and 2005 - a benign year - has now fallen out of the base period. The result for 2007 included the EEV impact of £295m (restated) from strengthened longevity assumptions.

• Persistency: contributed negative £126m (2007: negative £65m). Experience variances in the year were negative £12m - largely in unit linked bonds - and have been reflected in future assumptions with an adverse £114m assumption change.

• Expenses: overall contributed a positive £26m to the result (2007: negative £62m). Negative experience variances of £9m reflected a number of small items, including project costs. Positive assumption changes of £35m were driven by cost management in our individual protection and non profit savings businesses.

• Other: contributed £34m to the result, largely reflecting a positive foreign tax effect.

Development costs increased to £51m (2007: £44m) as we continued to invest in internal and customer facing systems.

For 2008, the managed pension funds business within Investment management has been reported on an IFRS basis, as management believe IFRS to be the most appropriate reporting basis for the Investment management business. 2007 comparatives have been restated accordingly. The change in the reporting basis has reduced 2007 operating profit before tax by £64m, profit after tax by £59m and shareholders' equity by £340m. Investment management operating profit on an EEV basis excludes £35m (2007: £23m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a 'look through' basis and as a consequence are included in the Risk, Savings and Group capital and financing covered business on an EEV basis. 

Worldwide operating profit was £870m (2007: £848m). Mark to market investment variances were negative £1,579m, compared to positive £116m in 2007. This was primarily due to equity and property underperformance against long term assumptions, partially offset by favourable variances in the value of in-force due to a change in credit strategy and outperformance against long term assumptions.

Economic assumption changes amounted to negative £609m (2007: positive £52m). This was largely a result of the risk discount rate and default reserving effects outlined above.  

Profit on ordinary activities after tax reflects the combination of operating profit with mark to market investment effects, and was negative £973m, compared to positive £1,153m in 2007. After allowing for £523m of shares repurchased in the period, shareholders' equity was £6,521m at the end of 2008, a reduction of 20%. This translates into a 14% reduction in embedded value per share to 111p (2007: 129p).

Revised accounting policies

IFRS - changes to segmental reporting

• New IFRS 8 segmentation has been adopted for 2008 to further improve shareholders' understanding of the Group's performance. The comparatives have been reclassified to reflect these changes. 

• Operating profit for the Risk segment includes protection, annuities and General insurance businesses.

• Operating profit for the Savings segment includes non profit investment bonds and pensions (including Suffolk Life), the with-profits transfer and the operating profit of our core retail investment business.

• Operating profit for the Investment management segment includes institutional fund management operating profit and the operating profit of our institutional unit trust business.

• Group capital and financing operating profit incorporates a longer term expected investment return on the average balance of Group invested assets (including interest bearing intra-group balances) calculated on a quarterly basis. This includes all shareholder assets in our UK Risk and Savings businesses (Legal & General Assurance Society Limited ('LGAS') and Legal & General Pensions Limited ('LGPL')) and those held at Group level. It also includes the cost of Group interest charges and other items.

There are a number of effects resulting from this change in presentation. The most significant is that investment return on assets within LGAS, which was previously reported in the UK life and pensions segment is now consolidated into Group capital and financing, and is not allocated to the Risk and Savings segments.

EEV - change to definition of covered business

In previous reporting periods Legal & General Assurance (Pensions Management) Limited ('PMC') results were consolidated as covered business within the EEV supplementary information. We believe that the performance of Investment management is better assessed on the IFRS basis. As a result PMC has been taken out of the covered business, and is now consolidated on an IFRS basis within our supplementary reporting. The 2007 year end embedded value and operating profit before tax have been restated down by £340m and £64m respectively to reflect this change.

The accounting treatment of PMC is now consistent under IFRS and EEV consolidation. However, the aggregate Investment management result under IFRS is £35m higher (2007: £23m higher) since it fully reflects the fees earned on internally managed funds which are reflected on a 'look through' basis under EEV. 

EEV - changes to segmental reporting

EEV results are now also presented under the new IFRS 8 segmentation. There are a number of effects resulting from this change in presentation. The most significant is that return on shareholder net worth, previously reported under UK life and pensions, is now consolidated into Group capital and financing and is not allocated to the Risk and Savings segments.

EEV - change in treatment of contingent loan

In previous reporting periods the balance sheet value and unwind of assumptions on our internal contingent loan were reported as part of shareholder net worth. We believe it is more appropriate to reflect this as part of the in-force business result. The expected return on this loan of £64m (2007: £51m) has been reallocated from Contribution from shareholder net worth into Contribution from in-force business. There is no effect on operating profit or shareholders' equity as a result of this change. 2007 comparatives have been restated.

 

END

 

 

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