Half Yearly Report - Part 1

RNS Number : 4257J

Legal & General Group Plc

07 August 2012

 



LEgal & General group plc interim management report 2012

7^th August 2012

LEGAL & GENERAL: dividends up 18% to 1.96p and earnings per share up 14% to 6.96p

financial highlights: 

·       INTERIM DIVIDEND UP 18% TO 1.96P PER SHARE (H1 2011: 1.66P PER SHARE)
Earnings per share UP 14% to 6.96p (H1 2011: 6.13p)

·       OPERATING PROFIT UP 5% TO £518M (H1 2011: £493M)
RISK, SAVINGS AND INVESTMENT MANAGEMENT ALL IMPROVED OPERATING PROFIT
IFRS PROFIT BEFORE TAX UP 11% £525M (H1 2011: £471M)

·       IFRS return on equity¹ 15.9% (h1 2011: 15.0%)

·       operational cash generation £471m (H1 2011: £477M)

net cash generation £407M (H1 2011: £406M)

·       IGD Surplus £3.8bn AFTER interim DIVIDEND (FY 2011: £3.8BN)

operational highlights: 

·       LGIm net flows up 33% to £4.0bn (H1 2011: £3.0bn) and AUM £381bn (FY 2011: £371bn)

·       Protection Gross premiums up 9%to £672m (H1 2011: £614m)
US Gross premiums up 13% to $456m (H1 2011: $403m)

Nigel Wilson, Group Chief Executive, said:

"These results evidence the quality of our model. We have delivered operating profit of £518m, profit before tax of £525m, operational cash of £471m and increased earnings per share by 14%, to 6.96p. Our confidence in the sustainability of Legal & General's performance has enabled us to progress the interim dividend to 1.96p, an increase of 18%.

"Our financial and strategic discipline creates confidence in complex and chaotic markets. In spite of economic conditions, we continue to grow. LGIM achieved strong net flows of £4bn, UK protection gross premiums grew by 9% to £672m, and we also achieved 13% growth in US gross premiums to $456m.

"We have strong businesses, and social and economic challenges bring opportunities which we intend to pursue at a faster pace. We maintain shareholder assets of over £6bn, and a strong capital surplus of £3.8bn. Our balance sheet strength and robust financial discipline provides Legal & General with options to accelerate our evolution, delivering further value for customers and shareholders."

Financials Pence per share	H1 2012	H1 2011
IFRS earnings per share (basic)	6.96	6.13
Operating profit earnings after tax per share (basic)	6.72	6.30
Operational cash generation per share	8.08	8.18
Net cash generation per share	6.98	6.97
Interim dividend per share	1.96	1.66
Average number of shares (m)	5,832	5,828

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

FINANCIAL SUMMARY

OPERATIONAL cash generation¹ £471m, net cash generation £407m

H1 2012 £m	Risk	Inv mgmt	Savings	Inter-national	Group capital & financing2	Investment projects	H1 2012
Operational cash generation	235	97	88	39	12	-	471
New business strain	(32)	-	(32)	-	-	-	(64)
Net cash generation	203	97	56	39	12	-	407
Operating profit	272	119	73	64	13	(23)	518
APE	168		614	107			889
H1 2011 £m	Risk	Inv mgmt	Savings	Inter-national	Group capital & financing2	Investment projects	H1 2011
Operational cash generation	233	91	89	35	29	-	477
New business strain	(40)	-	(31)	-	-	-	(71)
Net cash generation	193	91	58	35	29	-	406
Operating profit	236	117	68	64	33	(25)	493
APE	170		662	86			918

ASSETS - £381bn in LGIM, £67bn in savings, £29bn in annuities

Assets £bn	H1 2012	FY 2011
LGIM3	381	371
Savings	67	65
Annuities	29	28

eEV Results - embedded value per share 165p including lgim

EEV highlights	H1 2012	H1 2011
Worldwide new business margin (%)	4.2	3.5
	H1 2012	FY 2011
Equity per share (pence)	145	147
Equity per share including LGIM (pence)	165	167

1. Operational cash generation is defined as the post-tax operating profit on our Investment Management, General insurance and Savings Investments businesses together with the Group capital and financing segment, the sustainable dividends remitted from our International businesses, the expected release from in-force business for the UK non profit Risk and Savings businesses, and the shareholders' share of bonuses on with-profits business. Net cash generation is defined as operational cash generation less new business strain for the UK non profit Risk and Savings businesses. A reconciliation of net cash generation to IFRS profit after tax is provided in note 3.01.

2. Operating profit and operational cash generation for the Group capital and financing segment includes lower assumed returns on cash and LIBOR benchmarked bonds as reported at the 2011 FY. This has been applied to the H1 2011 operating profit and cash generation comparatives as if these changes had been in effect since 1 January 2011. The impact was to reduce H1 2011 operating profit by £28m and operational cash generation by £21m. There is no impact on IFRS profit before tax from these changes.

3. LGIM assets include those assets managed on behalf of Risk and Savings divisions including £29bn for Annuities and £49bn for Savings.

group results

Financial highlights £m	H1 2012	H1 2011
Operational cash generation	471	477
New business strain	(64)	(71)
Net cash generation	407	406
Analysis of operating profit
Risk	272	236
Investment Management	119	117
Savings	73	68
International	64	64
Group capital and financing	13	33
Investment projects	(23)	(25)
Operating profit	518	493
Asset related investment variances	15	(1)
Other investment variances	(9)	(20)
Property gains / (losses) attributable to non-controlling interests	1	(1)
Profit before tax	525	471

interim dividend increased by 18% to 1.96 pence per share

The Board's confidence in the strength of Legal & General's financial performance, as demonstrated by both continuing substantial cash generation and a strong balance sheet, underpins the decision to recommend an increase of 18% in the interim dividend to 1.96p (H1 2011: 1.66p) per share at a cost of £116m (H1 2011: £97m).

resilient Cash generation - Cash Growth from Business Divisions

Operational cash generation from our operating business divisions was up 2% to £459m (H1 2011: £448m), highlighting the resilience of these businesses to the current economic conditions. However, contribution from Group capital and financing was down by £17m, predominantly due to a fall in the assumed returns on equities to 5.8% (H1 2011: 7.5%) and a higher proportion of Group capital and financing assets held in cash during H1. Net cash generation is broadly flat at £407m (H1 2011: £406m), reflecting 5% growth from business units to £395m (H1 2011: £377m) which includes the benefit of lower new business strain despite higher sales in Protection and Insured Savings.

business highlights - Strong Operational Results

Risk delivered another strong performance and operating profit of £272m (H1 2011: £236m). This benefited from growth in Protection and Housing gross premiums of 10% to £838m as a result of individual protection's leading market position and a record quarter for group protection sales. Operational cash generation increased to £235m (H1 2011: £233m) and net cash generation to £203m (H1 2011: £193m). Sales of individual annuities continued to be resilient at £52m (H1 2011: £52m). In bulk purchase annuities, activity was lower at £7m (H1 2011: £24m). Our expertise has supported good quote activity and we continue with the discipline of writing schemes in this market providing they meet our target return on economic capital. Following the end of the reporting period, Annuities has secured schemes worth approximately £300m, which met our criteria and will be reported in H2 2012. The General Insurance business delivered an operating profit of £8m (H1 2011: £17m) which includes the impact of freezing weather and storms in the early months of the year, and flood claims in June.

LGIM gained net new business of £4.0bn (H1 2011: £3.0bn) and assets under management of £381bn (FY 2011: £371bn) and delivered operating profit of £119m (H1 2011: £117m). LGIM has continued to deliver on its strategy of geographic diversification with £3.1bn of gross inflows from international clients in the first half of the year. This momentum continued into July when we secured a significant mandate from the Gulf and our first Asian mandate.

Liability Driven Investments (LDI) and Active Fixed Income gross inflows were up 42% to £6.8bn (H1 2011: £4.8bn) and accounted for 45% of LGIM's gross new business.  LGIM's capability in these areas continues to attract flows, as the trend for de-risking of defined benefit pension schemes continues.

Savings operating profit of £73m was up 7% (H1 2011: £68m) and net cash generation was resilient at £56m (H1 2011: £58m). Positive flows in Savings Investments and Insured savings were £0.7bn whilst with-profits maturities experienced net outflows of £0.8bn.

Savings continues to deliver against the strategy of securing large employer schemes ahead of auto enrolment and will have access to approaching half a million potential auto enrolees and a further 114,000 existing members. Since June we have received £160m of assets from members of these schemes.

International sales APE was up 24% to £107m (H1 2011: £86m) due to the continued growth in sales in the US. The operating profit is in line with prior year at £64m (H1 2011: £64m).

Group capital and financing operating profit was impacted by the fall in the expected return on assets to 3.8% p.a. (FY 2011: 4.7%). This reflects the reduction in the assumed returns on equities to 5.8% (H1 2011: 7.5%) and a higher proportion of assets held in cash during H1. As a result operating profit reduced to £13m (H1 2011: £33m).Group capital and financing assets continued to grow with invested assets up to £4.5bn (FY 2011: £4.3bn).

robust BALANCE SHEET - Managed with Financial Discipline

The Group's balance sheet, managed with financial discipline, remains robust with an IGD surplus of £3.8bn (FY 2011: £3.8bn), after allowing for the accrual of the interim dividend, and a coverage ratio of 224% (FY 2011: 220%).

The LGPL credit default provision of £1.6bn (FY 2011: £1.6bn) remains in place to fund against the risk of credit defaults and is equivalent to 60bps (FY 2011: 61bps) of defaults over the life of the portfolio. We have had another six months of no defaults.

strategy and OUTLOOK - Resilience Plus Opportunities Equals Growth

Our financial and operational strength gives us:

·      resilience against negative external events

·      a range of options to accelerate growth

·      the sustained ability to deliver attractive returns to shareholders.

Therefore despite the current political, economic, regulatory and financial uncertainty, we are able to provide relevant and value added solutions and services to our customers in our chosen markets.

We expect that the industry will continue to face challenging economic headwinds and continue to plan accordingly. The UK economy is likely to perform poorly and we expect further macro shocks across the world, particularly in the Eurozone. The negative combination of fiscal regulatory and banking austerity will act as a brake on economic growth in the UK. Meanwhile, corporates appear to lack the confidence to invest for growth, notwithstanding their strong balance sheets and cash positions.

Legal & General has demonstrated resilience in volatile financial markets, and we remain confident that in spite of economic conditions we will continue to grow. Business momentum from the first half year has continued in July, with several BPA schemes completed and investment management mandates gained.

Our business model is proving resilient due to:

·      our strong market position in our chosen markets

·      our focus on metrics that matter, particularly cash

·      our financial and strategic discipline, including operational efficiency gains and asset de-risking.

This combination has enabled us to deliver sector-leading returns to investors while building a strong balance sheet.

Numerous macro and industry trends are creating opportunities for growth, including:

(1)  The decline in state spending will increase the UK "pension gap" and the "protection gap", and as a consequence we expect growth from auto enrolment, group protection and individual annuities.

(2)  Pension de-risking across the corporate world will allow us to pool risk and use our economies of scale.  Our LDI business is already over £60bn and we are also achieving substantial progress in our fixed income business with AUM at H1 at £77bn and high activity in the larger bulk purchase annuities market both in and outside of the UK.

(3)  The deleveraging of banks and its impact on bank lending creates a "funding gap" which enables us to expand investment in some areas where we already had a presence, such as commercial property lending and social housing finance, and potentially to enter some new areas including infrastructure and trade finance.

(4)  The globalisation of asset markets is allowing LGIM to expand rapidly in international markets, particularly with sovereign wealth funds and corporates, including in the Gulf (circa $10bn AUM), the US (27 mandate wins, AUM around $28bn), as well as securing our first mandate in China.

(5)  Regulatory changes including Retail Distribution Review (RDR), Auto enrolment, and Solvency II are producing further competitive opportunities. For example our "RDR distribution partnerships" mean we have secured access to around 80% of the building society branches in the UK, providing access to over 75% of building society customers.

PRINCIPAL RISKS AND UNCERTAINTIES - Continuing To Plan for Difficult Scenarios

We operate strong governance of risk with a framework and controls, which are embedded across all our businesses, and which include clear limits for our material risk exposures. We recognise the increased uncertainty of the macro economy and the need to review regularly the effectiveness of our responses to regulatory and social change.

We benefit from a high degree of diversification in products and distribution channels. We have avoided products with un-hedged interest rate guarantees and our liabilities are well matched. These factors increase our resilience to changing regulatory, economic and market dynamics. Our IGD surplus at 224% of solvency capital provides strong capability to mitigate any impacts from possible economic scenarios.

The Group uses the expertise of LGIM to regularly assess its asset exposures, making forward looking assessments of economic and company specific risks and ensuring a high degree of diversification both globally and in asset classes. The Group will reflect these views in the management actions on the portfolio.  The Group had another six months of no defaultsand continues to hold a £1.6bn default provision within the main UK annuity subsidiary. Legal & General has minimal direct exposure to the Eurozone with two relatively small European operations (LGN and LGF) and low holdings of sovereign and corporate debt issued from the GIIPS economies (£1.1bn out of a total portfolio of £40.1bn).

The direction of travel on Solvency II is broadly positive, with a broad consensus now emerging about the application of a Matching Adjustment to categories of long-dated liabilities including UK pension annuities. Debate continues in Europe and Legal & General remains heavily engaged in discussion about the detail of rules and we expect implementation could be later than 2014. There also remains uncertainty about the final approach to how required capital is determined and the transition from the current capital regime.  We have allocated sufficient skilled resources to developing capital modelling under Solvency II and we are on track to submit our internal model application to the FSA by the end of 2012.

We have secured sole provider access to the UK's leading building societies and therefore in relation to the RDR we are well placed with diversified sources of distribution for Savings products. We have developed a platform strategy to ensure we can reach all parts of the market. We also benefit from scale in Protection. However, in the short term there may be disruption in the market as advisers manage the transition. Legal & General is delivering a comprehensive programme with strong executive governance to ensure compliance with RDR and to support our partners to trade effectively under the new regime.

We are ensuring operational readiness for the start of auto enrolment in Q4 2012. Transfers of some existing schemes have started in July 2012 and we have planned phased loading of large numbers of new members in line with employer staging dates.

A detailed list of the Group's Principal Risks and Uncertainties are set out below

Business review - RISK.

Financial highlights £m	H1 2012	H1 2011
Operational cash generation	235	233
New business strain	(32)	(40)
Net cash generation	203	193
Experience variances, assumption changes, tax and other variances	69	43
Operating profit	272	236
Asset related investment variances	5	15
IFRS profit before tax	277	251
New Business APE	168	170

divisional Overview - Very Strong Performance

Protection and Housing increased gross premiums by 10% to £838m (H1 2011: £760m) and delivered 16% growth in APE to £109m (H1 2011: £94m). This resulted from the benefits of our automatic underwriting technology, continued product innovation and success in attracting new employer schemes. Market share has extended further.

Annuities assets under management increased to £28.9bn (FY 2011: £28.4bn). Sales of individual annuities have been stable with £52m APE written, but H1 has seen less activity on bulk purchase annuity (BPA) volumes. Market volumes from period to period are characteristically uneven and sales were £7m in H1 2012 (H1 2011: £24m); however we secured schemes worth circa £300m in July which will be reported in H2 2012. We remain committed to all parts of the market whilst continuing to exercise strong disciplines in pricing.

Operational cash generation increased to £235m (H1 2011: £233m) due to the growth in scale of both the Annuities and Protection and Housing businesses, offset by higher weather related claims for General Insurance. Net cash generation increased to £203m (H1 2011: £193m) with lower new business strain in Protection despite higher volumes, and new business surplus in Annuities of £1m (H1 2011: £1m).

Operating profit increased by 15% to £272m(H1 2011: £236m) aided by the growth in net cash generation and the improvement of group protection claims experience in H1 2012. The Risk division again delivered positive experience and assumption changes reflecting the strong understanding of the business and robust assumption setting.

Protection and housing - Building on Momentum from 2011

Financial highlights £m	H1 2012	H1 2011
Operational cash generation	114	121
New business strain	(33)	(41)
Net cash generation	81	80
Protection new business APE	109	94
Protection new business EEV margin (%)	10.8	6.4
Protection gross premiums	672	614
General Insurance gross premiums	166	146
Total gross premiums	838	760
General Insurance new business premiums	65	54
General Insurance combined operating ratio (%)	99	93

Individual protection continues to deliver an outstanding performance in 2012. New business APE was up 11% to £72m (H1 2011: £65m) providing cover for over 200,000 new customers. Gross premiums grew 5% to £468m (H1 2011: £447m) and we maintain our market leading position.

Protection New business strain has decreased to £33m (H1 2011: £41m), which represents 30% of new business APE (H1 2011: 44%). This reduction reflects the benefits of our largely automated underwriting model and reinsurance management. The Protection & Housing continues to grow in scale with a 10% increase in gross premiums to £838m (H1 2011: £760m).

Higher weather related claims in General Insurance reduced Operational cash generation to £114m (H1 2011: £121m) against the previous year.  For FY 2011, we reported significantly improved Protection new business margin of 9.3%, as a result of strong cost management and innovation in underwriting. The latter enabled us to evidence improved certainty of claims and as a result to gain improved reinsurance terms. Continuing cost discipline, efficiency from high volumes and more profitable mix, have enabled further progression of the new business margin to 10.8% (H1 2011 6.4%). For FY 2012, we expect the margin to be at similar levels to FY 2011.

We have grown sales from protection products targeted at specialist needs such as protecting against loss of a bread winner, loss of a business partner or the financial impact of serious illness.  Protection benefits from diversified distribution through IFAs, employee broker consultants, tied relationships with banks and building societies, L&G Direct and the L&G Network. In the period, we successfully renewed our tied partnership with Nationwide Building Society, broadened our tied distribution agreement with Yorkshire Building Society and agreed new tied partnerships with Leeds Building Society and First Trust Bank. We have access to both mortgage and family protection sales in these channels.

The L&G Network increased share of the intermediated mortgage market to a 25% share in H1 2012 (H1 2011: 19%), and with £9bn of intermediated lending retains a strong position in the intermediated mortgage market. L&G Network's appointed representatives achieved a good rate of 1.6 protection and general insurance policy applications per mortgage application.

Group Protection increased sales 28% to £37m APE (H1 2011: £29m), through increased focus on sales of group income protection and the acquisition of schemes from several employers who were previously self-insured and who wanted to reduce their exposure to open ended liabilities.

General Insurance gross written premiums increased by 14% to £166m (H1 2011: £146m). We have continued to develop our share of the direct market, with new business premiums through this distribution increasing by 135%. Growth has also been achieved through broker distribution, where we have been successful in developing existing and new partner relationships. The business now has in excess of one and a half million policyholders.

The benefits of the growing book size were offset by freezing weather and storms in the early months of the year, and heavy rainfall with associated flooding in June. As a result of higher claims, the combined operating ratio increased to 99% (H1 2011: 93%) and operating profit was lower at £8m (H1 2011: £17m).

annuities - Resilient Individual Annuity Volumes

Financial highlights £m	H1 2012	H1 2011
Operational cash generation	121	112
New business surplus	1	1
Net cash generation	122	113
Individual annuity new business APE	52	52
Bulk annuity new business APE	7	24
Total annuity new business APE	59	76
Annuities new business EEV margin (%)	8.5	8.4

Operational cash generation was up 8% to £121m (H1 2011: £112m) reflecting increasing scale of the portfolio. Net cash generation of £122m includes new business surplus of £1m (H1 2011: £1m). The Annuities division now pays 675,000 annuitants, up from 624,000 a year earlier.

Individual annuity new business APE has been maintained at £52m (H1 2011: £52m) as we continue to benefit from a steady flow of annuitants from our own pensions business as well as our strong distribution arrangements. We continue to see some evidence of people deferring their retirement in the current low interest rate environment. However, through our disciplined approach to writing new business, we are providing competitive levels of retirement income to our customers whilst achieving our target return on economic capital.

In the BPA market, we wrote 28 schemes worth £7m APE (H1 2011: 45 schemes worth £24m). BPA volumes are inherently uneven, and there can be large fluctuations from period to period. Pension deficits continue to build and trustees of pension schemes of all sizes remain interested in options to reduce risk and remove balance sheet risk. However, timing of execution depends on individual scheme factors, strength of ongoing funding and market pricing.

Legal & General benefits from strong capability to quote and structure BPA deals which includes having expertise in longevity science, processes to handle large scheme transfers and LGIM's expertise in asset liability matching.

Outlook - BPA Volumes of c£300m Premiums Secured in July

Overall, individual annuity volumes continue to be resilient. The trend of growing numbers of customers in defined contribution pension savings products creates an increasing opportunity for the individual annuity market. However, we see evidence that some consumers are delaying their retirement in the current climate of economic uncertainty. Our distribution of annuities is well diversified across IFAs, internal vesting, direct and distribution partnerships, and we believe the direct market will become more active after the implementation of RDR. We have developed our pricing and operational capabilities to be well positioned for the new gender discrimination rules that apply to new business from 21 December 2012.

In July we secured BPA schemes with premiums of approximately £300m which will be reported in H2 2012. With a potential market of over £1,000bn and a deal flow of on average £9bn per annum the BPA market remains a key focus. The pattern of BPA deals will remain uneven, but market volatility has exposed the impact of pension liabilities on companies' balance sheets such that businesses are increasingly likely to look to mitigate risks. Legal & General offers a range of de-risking solutions across the full spectrum of scheme sizes.

We continue to increase our family protection sales and have grown sales from protection targeted at specialist needs such as protecting against loss of a bread winner, loss of a business partner or the financial impact of serious illness. We see no sign of a recovery in housing activity, but our continuous refinement of our consumer standalone application has gained share from the growing volumes of online and telephone direct brokers and supported growth in our direct operation.

It is possible there will be some short term disruption at the end of 2012 to the market from regulatory change (gender neutral pricing, RDR, I-E tax changes). This brings both risks which we are taking steps to mitigate, and potential opportunities, from which if they emerge, we are well placed to benefit.

Our outlook for Group Protection in H2 2012 remains positive.  Our product proposition gives us a strong position to drive growth from private and public sector employers.  When funding of auto enrolment schemes start, employers may scale back other employee benefits as a consequence of providing pension contributions to a higher number of employees. However, this may be offset by a corresponding growth in pension life cover membership.

We have continued to grow our General Insurance business in H1 2012, with gross premiums growing by 14% both through increasing our presence in the direct market and developing new and existing broker relationships. We anticipate growth in these distribution channels to continue into the second half of the year.

Business review - Investment Management

Financial highlights £m	H1 2012	H1 2011
Operating profit	119	117
Total revenue	219	205
Total costs	(100)	(88)
Net cash generation	97	91
Average ad valorem fee margin (bps)	10.9	10.9
Average expense margin (bps)	5.5	5.2
Gross inflows (£bn)	15.0	17.9
Net inflows (£bn)	4.0	3.0
	H1 2012	FY 2011
Closing assets under management (£bn)	381	371

divisional Overview - Pension De-risking Driving Strong Flows

LGIM's total revenue for the first half of the year was up 7% to £219m (H1 2011: £205m) and the half-year operating profit increased to £119m (H1 2011: £117m). The expense margin increased slightly to 5.5bps (H1 2011: 5.2bps). LGIM is reinvesting revenue in business resources, which will support the future growth in scale and profit from international expansion and acquisition of further LDI and Active Fixed Income mandates. Assets under management (AUM) grew 3% to £381bn (FY 2011: £371bn) and net inflows were £4.0bn, an increase of 33% compared to H1 2011.

LDI gross inflows were up 22% to £3.3bn (H1 2011: £2.7bn) and accounted for 22% of LGIM's gross new business.  LGIM has seen increased interest in its LDI and Active Fixed Income capabilities as the de-risking of defined benefit (DB) pension schemes continues.  

LGIM's Active Fixed Income gross inflows were up 67% to £3.5bn, (H1 2011: £2.1bn) accounting for 23% of total gross new business, as these strategies experienced a significant amount of interest.

LGIM's International AUM is up 17% to £21.5bn (FY 2011: £18.3bn) and geographic diversification continues to result in strong inflows from international clients. LGIMA (LGIM America), our US operation, has continued to experience positive momentum, with 10 new clients added during the first half of 2012.

Asset movements £bn	Index	Active	Total
Assets under management (at 1 January 2012)	224.2	147.0	371.2
Gross inflows	8.2	6.8	15.0
Gross outflows	(8.7)	(2.3)	(11.0)
Net flows	(0.5)	4.5	4.0
Market and other movements	3.3	2.8	6.1
Assets under management (at 30 June 2012)	227.0	154.3	381.3

index assets - Broader Range Supporting Resilience

The Index business continues to be an important source of revenue generation. Index assets remain core to the LGIM business model with 60% of LGIM's AUM being invested in index funds.

Defined contribution (DC) asset inflows brought LGIM's total DC book of business to £23.0bn at the end of June 2012 (FY 2011: £21.3bn).

LGIM's expanded range of alternatively weighted equity index funds is generating growing interest. Additionally, during the first half of 2012, LGIM and Workplace Savings launched a facility for DC clients to create products consisting of LGIM funds and those of external managers.

Asset movements £bn	UK equities	Int'l equities	Fixed interest	Total
Assets under management (at 1 January 2012)	63.3	82.2	78.7	224.2
Gross inflows	1.9	3.5	2.8	8.2
Gross outflows	(2.7)	(3.1)	(2.9)	(8.7)
Net flows	(0.8)	0.4	(0.1)	(0.5)
Market and other movements	(0.4)	5.8	(2.1)	3.3
Assets under management (at 30 June 2012)	62.1	88.4	76.5	227.0

LDI and active assets - Strong Demand for De-risking Solutions

As DB pension schemes de-risk, LGIM continues to experience strong demand for LDI solutions both within the UK and targeted international markets with gross inflows 22% higher at £3.3bn (H1 2011: £2.7bn). We continue to work closely with pension schemes and their advisors to establish optimal de-risking strategies.

LGIM has seen increased demand for its Active Fixed Income capability. Gross inflows have increased by 67% to £3.5bn (H1 2011: £2.1bn). LGIM's focus on developing products which embrace global diversification and continued strong fund performance has driven interest from both domestic and international clients. LGIMA has played a particularly strong part in this and continues to show positive growth.

LGIM's Sterling Liquidity Fund has experienced good inflows. Its diversification strategy has resonated with clients in the current economic environment.

Asset movements £bn	Equities	Fixed interest	Property & other	LDI	Total
Assets under management (at 1 January 2012)	7.2	72.4	9.0	58.4	147.0
Gross inflows	-	3.5	-	3.3	6.8
Gross outflows	-	(1.0)	-	(1.3)	(2.3)
Net flows	-	2.5	-	2.0	4.5
Market and other movements	(0.2)	2.3	(0.1)	0.8	2.8
Assets under management (at 30 June 2012)	7.0	77.2	8.9	61.2	154.3

Outlook - Momentum in the International Business to Continue

The rapid development of the UK pension industry continues to be driven by market conditions and regulatory changes. For UK DB schemes, we expect the focus to remain on de-risking solutions, which is likely to result in declining equity allocations. At the same time we expect to gain more fixed income and LDI mandates, as existing clients de-risk and new clients are attracted to these capabilities.

LGIM continues to expect demand for more innovative index mandates, as well as its growing array of passively managed strategies and core competencies in transition management, currency hedging and dynamic asset allocation services.

LGIM expects the international business to continue the momentum from the first half of 2012.  LGIMA has made a very strong start to 2012 and is well placed to build on this. We have seen ongoing positive momentum in Active Fixed Income and LDI and further new business inflows are expected before the end of the year.

In July 2012, we gained an index mandate from a new Gulf client.   In the Gulf region investors are sitting on healthy cash surpluses, and although they remain cautious due to global economic conditions, we expect to see a number of additional mandates this year.

In July we won our first Asian mandate and LGIM's planned geographic expansion into the Asian market is making good progress. An office in the region is scheduled to be operational before the end of 2012.

The unresolved Eurozone sovereign debt situation will remain a major influence on the financial services industry. There continues to be significant uncertainty about scenarios including the impact of potential Eurozone failure. Nevertheless, we have undertaken contingency planning at an operational and a business level with the aim of limiting the negative impact across a number of scenarios.

In the current environment, clients are becoming increasingly aware of risks. We expect this to drive demand for our full complement of index, active and LDI strategies as we work with clients to implement solutions to meet their long-term objectives.

Business review - Savings

Financial highlights £m	H1 2012	H1 2011
Operational cash	88	89
New business strain	(32)	(31)
Net cash generation	56	58
Experience variances, assumption changes, tax and other variances	17	10
Operating profit	73	68
Asset related and other investment variances	(6)	(2)
IFRS profit before tax	67	66
New business APE	614	662
Net flows (£bn)	(0.1)	1.1
New business strain % PVNBP1	2.4	2.6
In-force costs to funds (bps)	24	26
	H1 2012	FY 2011
Assets under administration (£bn)	67	65
1. UK Insured Savings business.

divisional Overview - Strong Operating Profit in Challenging Market

Savings Operating profit grew by 7% to £73m (H1 2011: £68m), a robust operating result against the backdrop of continuing investment market weakness.  Operational cash generation was also resilient at £88m (H1 2011: £89m). Net cash generation of £56m (H1 2011: £58m), also reflects new business strain of £32m (H1 2011: £31m). We have again written new business more efficiently, with strain as a % of PVNBP reduced to 2.4% (H1 2011: 2.6%; FY 2011: 2.7%) after allowing for increased strain to support 10% higher new business sales in Insured Savings. The Investment Savings and Insured Savings business delivered net inflows of £0.7bn; maturing endowment policies resulted in net outflows from With-profits of £0.8bn.

We have secured distribution and customer access ahead of RDR during the first half of 2012.  We have agreed a continuation and extension of our long standing relationship with Yorkshire Building Society (now including the Chelsea and Norwich & Peterborough building societies), together with further new relationships with Leeds Building Society and First Trust Bank of Northern Ireland. We now have sole tie distribution relationships with over 75% of the UK building society sector in terms of customers, across over 1,100 branches. In addition, during H1 2012 our Workplace Savings business secured 57 new schemes with 41,000 existing pension saving employees and almost 108,000 potential new auto enrolees.

We continually invest in evolving our business and developing our operating model. In recent periods, this development has been focused on strategic responses to RDR and auto enrolment. Our RDR development is delivering an effective restricted advice solution to meet the needs of our key distribution partners. In Workplace Savings, in response to the opportunities created by auto enrolment, we have developed a market-leading proposition to meet the needs of employees and employers alike, as well as ensuring our model is both efficient and scalable.

Asset movements £bn	Savings Investments	Insured Savings	With-profits	Total
Assets under administration (at 1 January 2012)	25.3	19.1	20.5	64.9
Gross inflows	2.9	1.4	0.5	4.8
Gross outflows	(2.3)	(1.3)	(1.3)	(4.9)
Net flows	0.6	0.1	(0.8)	(0.1)
Market movements	0.6	0.8	0.4	1.8
Assets under administration (at 30 June 2012)	26.5	20.0	20.1	66.6

Insured Savings - Continuing Momentum in Workplace Savings

Insured Savings operating profit grew by 45% to £29m (H1 2011: £20m). Net cash generation remained resilient at £21m (H1 2011: £20m), underpinned by operational cash generation of £53m (H1 2011: £51m) as the book grows in scale. Assets under administration increased by 5% during the first half of the year to £20.0bn (FY 2011: £19.1bn).

We have secured a further 57 new workplace pension schemes during the first half of 2012 (FY 2011: 133).  This is expected to generate the transfer of over 41,000 existing members (FY 2011: 94,000), as well as additional opportunities from their auto enrolment populations, when these schemes come on-stream.  In total over the last 18 months, we have secured a total of 135,000 transferring existing members; 21,000 of these have already been loaded onto Legal & General systems and the majority of the remaining 114,000 will transfer over the next 9 months, together with 458,000 potential auto enrolees.

Workplace pension non profit net flows for business in the first half of 2012 grew by 133% to £0.7bn (H1 2011: £0.3bn). As a result, non profit assets increased by 21% during the first half of the year to £4.6bn (FY 2011: £3.8bn), and in-force non profit scheme members now number almost 227,000 (FY 2011: 211,000).

Savings Investments - Positive Net Flows Despite Macro Economic Impacts

Operating profit in our Savings Investment businesses was £9m (H1 2011: £13m), while net cash generation was £9m (H1 2011: £12m). Results in this segment were primarily impacted by a reduction in volumes and therefore profits from structured products as macro economic conditions impacted product pricing.

Total Savings Investment assets under administration as at the end of June were £26.5bn (FY 2011: £25.3bn), a 5% increase over the end 2011 level as strong sales of collectives on our Investor Portfolio Services (IPS) platform contributed to net inflows of £0.6bn (H1 2011: £1.7bn).

Total Savings Investment gross flows were £2.9bn (H1 2011: £3.5bn), underpinned by new business APE of £314m (H1 2011: £371m).

Sales on our open architecture platform, IPS, increased by 25% to £133m (H1 2011: £106m). Sales of our own manufactured Unit Trusts and ISAs were £121m APE (H1 2011: £157m). These have been impacted by low market confidence, although we have seen some signs of recovery with Q2 APE of £66m, a 20% increase on Q1 2012.  We have sold fewer structured products, as low interest rates impact pricing and hence the relative attractiveness of these products to customers. Uninsured SIPP business was broadly flat at £44m (H1 2011: £45m).

 with-profits Savings - Maturing Endowments Resulting in Outflows

With-profits Savings operating profit, representing the shareholders' share of the with-profits bonus, was in-line with the prior year at £35m (H1 2011: £35m), as was net cash generation at £26m (H1 2011: £26m). Assets under administration reduced by 2% to £20.1bn (FY 2011: £20.5bn). Net outflows of £0.8bn reflect maturing endowment policies sold in the 1980s.

outlook - Regulatory Change Driving Opportunities Despite Difficult Retail Market

In the short term we expect retail investment conditions to remain challenging.  It is likely that low levels of retail investor confidence in the market, together with constraints on consumers' disposable incomes will continue into H2.

We have a strong pipeline of workplace schemes.  Our Workplace Savings strategy is to focus on large schemes with our highly automated low cost employer solutions. Employers are revisiting their existing pension provision in light of the upcoming new auto enrolment regulations and we remain well placed to take advantage of the opportunities this brings.

We have secured 6 of what we believe are the 12 largest employers with auto enrolling staging dates in 2012.  We announced our appointment as administrators of the Co-operative Group's new trust based scheme at the beginning of July. This scheme brings over 4,000 existing employees, together with an estimated 40,000 employees who will meet auto enrolment criteria and a further 30,000 employees who could opt into the scheme. Subject to final agreement of timing with individual employers, we expect to load the existing members' assets for all six of these schemes during the second half of this year, together with the auto enrolment populations for two of the schemes to align with their staging preference. We started this process with circa 10,000 existing Marks and Spencer scheme members transferred in July. Our total population of potential auto enrolees is now approaching half a million (FY 2011: 350,000) and we continue to see significant interest in our workplace proposition, with a strong pipeline of new business enquiries leading into the second half of 2012.

We now have access to over 70% of UK building society branches, which service over 75% of customers within the sector. We believe that building societies are well placed for the efficient provision of financial advice following the implementation of RDR.  Our expertise and services in fund assembly and panel construction are valued by these and other partners. We are confident that these services can be extended to a wider restricted advice market which is likely to grow post-RDR. We also believe that RDR will increase customer demand for low cost funds. We expect an increase in flows into retail passive funds, attracted by our low cost capability in passive management.

Savings has developed an integrated platform strategy which will provide access to our products through IPS for our bancassurance partners and restricted advisers and through Cofunds for independent financial advisers. In addition to these two core gateways, our products are now available on seven of the leading platforms in the UK market. For our own IPS platform, we have focussed on meeting the needs of our partners' customers for simple saving and investment solutions. We have restricted the choice of product to the key four which the majority of customers require; ISAs, onshore bonds, Self Invested Pension Plans (SIPPs) and unit trust general investment accounts. This strategy facilitates lower platform charges and lower future development costs. IPS, which is the third largest platform in the UK by customer numbers, continues to attract business, growing by 12% in the first half of 2012 to £7.6bn (FY 2011: £6.8bn) of combined mutual fund and insured assets. Our products are also offered on the largest UK platform, Cofunds, which holds £41bn of assets under administration, and of which we have a 25% shareholding.

 Business review - International

Financial highlights £m	H1 2012	H1 2011
USA	51	48
Europe (Netherlands and France)	17	18
Egypt, the Gulf and India	(4)	(2)
Operating profit	64	64
Net cash generation	39	35
New Business APE	107	86

divisional Overview - Strong Sales Growth in L&G America

International sales were up 24% at £107m APE, driven by strong Legal & General America (LGA) sales growth, up 31% to £42m (H1 2011 £32m).

Operational cash generation by the International division of £39m (H1 2011: £35m) includes the $60m (H1 2011: $55m) dividend from LGA. We expect dividends from Europe in the second half of the year to increase the operational cash generation to £55m for the full year (FY 2011: £51m), subject to exchange fluctuations. International operating profit of £64m (H1 2011: £64m) is in line with the prior year.

Legal & general America (LGA)¹ - Capital Release increases Capacity for New Business

Financial highlights $m	H1 2012	H1 2011
Operating profit	81	78
IFRS profit before tax	81	77
New business APE	66	52
Gross premium income	456	403
Net cash generation	60	55
New business margin (%)	10.9	9.8
	H1 2012	FY 2011
Embedded value	1,608	1,647
1. In 2012, the Group applied the new US accounting policy on the recognition of Deferred Acquisition Costs (DAC) which changed the rules on capitalising costs incurred in acquiring insurance business. Applying this retrospectively reduced the opening 2012 shareholders' equity of the Group (and LGA) by $216m and lowered H1 2012 operating profit by $9m (H1 2011: $3m). This has no effect on EEV or IGD surplus. Details of the adjustment are outlined in note 2.08.

LGA has delivered 27% growth in H1 sales to $66m (H1 2011 $52m) and improved the new business margin, which increased to 10.9% (H1 2011: 9.8%).  LGA writes individual protection policies in the USA. It competes in this market by being a low cost operator and delivering expert, medical-based underwriting on high sum assured policies. This increase in sales resulted from working closely with its distributors and with increased capacity for new business afforded by the capital restructuring programme. 

The resulting 13% growth in gross premiums to $456m (H1 2011: $403m) led to an increase in operating profit in the year. LGA experienced a higher number of claims than expected during the first quarter of the year, but this has trended back towards assumptions in the second quarter. This resulted in adverse experience of $15m for the half-year.

Legal & general EUROPE (LGN & LGF) - Progress in Protection

Financial highlights €m	H1 2012	H1 2011
Operating profit	21	21
IFRS profit before tax	35	27
New business APE	60	52
Gross premium income	362	369
Net cash generation	2	1
New business margin (%)	1.0	0.6
	H1 2012	FY 2011
Embedded value	548	556

European APE growth of 15% to €60m (H1 2011: €52m) reflects the market re-launch of the Legal & General Netherlands (LGN) individual protection product in November 2011, which increased protection APE to €7m (H1 2011: €1m). LGN's share of the Dutch term insurance market has risen from 3% to 14%.

In Legal & General France (LGF) the retail Savings operation targets high net worth clients, serviced by a direct sales force, while group protection sells life, disability and medical expense cover to small and medium sized businesses. LGF achieved growth in both retail savings and group protection with APE of €47m (H1 2011: €43m).

Operating profit of €21m (H1 2011: €21m) remained in line with prior year.

emerging markets - Growth in APE

In Emerging markets we grew sales to £16m (H1 2011: £8m).  This growth in APE primarily reflects the recovery of sales in Egypt from more stable political conditions.  We also continue to make progress with our joint ventures in India, and the Gulf.

Outlook - Further Opportunities in LGA 

We have a promising pipeline for US sales and in LGA we continue to explore new protection product and distribution opportunities. Given strong application levels in LGA, we are confident of continuing to deliver sales growth for the remainder of the year.

Opportunities remain to free up excess capital held as a result of the XXX/AXXX reserving regime in the US. We anticipate transacting another phase of our US capital management programme to release further capital in LGA in the second half of 2012 and a capital efficient structuring for new business in 2013. Further phases are likely to follow.

In Europe, we continue to progress our efforts to optimise our capital structure.  In this regard, we are monitoring closely the stance of regulators which could be influenced by a number of political and economic factors including the Eurozone crisis, a new government in France, and elections in the Netherlands which are due in September.

business review - Group Business Unit

group capital and financing - Lower Assumed Returns

Financial highlights £m	H1 2012	H1 2011
Investment return	84	102
Interest expense	(63)	(62)
Investment expenses and unallocated corporate expenses	(8)	(7)
Group capital and financing operating profit	13	33
Operational cash generation	12	29
	H1 2012	FY 2011
Closing Group capital and financing assets	4,529	4,344
Closing outstanding debt balances	2,769	2,732

The smoothed investment return of £84m (H1 2011: £102m) is calculated asset class by asset class and equates to an annualised average smoothed investment return of 3.8% (FY 2011: 4.7%) on the average balance of invested assets of £4.4bn (H1 2011: £3.8bn). The fall in the average investment return is predominantly due to a fall in the assumed returns on equities to 5.8% (H1 2011: 7.5%) and a higher proportion of Group capital and financing assets held in cash during H1.

After equity markets rose in the first quarter of the year we took the decision to reduce our equity exposure and protect some of the holdings against a fall in equity markets. We regularly, with the benefit of LGIM's expertise, reassess our portfolio allocations against our risk appetite.

Interest expense of £63m (H1 2011: £62m) reflects the average cost of debt of 4.8% per annum (H1 2011: 4.8%) on average debt balance of £2.6bn (H1 2011: £2.6bn).

GROUP TAX Rates - Benefiting from Lower Effective Rate

Equity holders' effective tax rate	H1 2012 %	FY 2011 %	H1 2011 %	FY 2010 %
UK	20.3	23.1	22.4	24.3
Overseas - blended	34.5	33.6	36.6	28.7
Total Effective Tax Rate	22.5	24.4	24.3	24.9
Annualised rate of UK corporation tax	24.5	26.5	26.5	28.0

In H1 2012, the Group's effective tax rate continues to be approximately 2% lower than the UK's standard rate of tax, continuing the trend that has extended for several reporting periods. The effective tax rate falls below the headline rate due to a number of standard differences between the measurement of accounting profit and taxable profit, such as non-taxable dividends. In addition, there are some current period adjustments such as previously unrecognised deferred tax assets which have been brought into account.

We expect the effective tax rate at H1 2012 of 22.5% to be similar for the full year.

CHANGES TO THE uk CORPORATION TAX REGIME FOR LIFE INSURERS

There have been fundamental changes to life assurance tax law which will come into effect on 1 January 2013. We do not anticipate any material impact on EEV or IFRS profit from these changes.

Deferred tax asset utilisation

Deferred tax £m	H1 2012	FY 2011	H1 2011
Excess and deferred expenses (XSE)	212	209	274
Capital losses	156	147	31
Trading losses	118	159	209
Other	(8)	(22)	(37)
UK net deferred tax asset	478	493	477
Overseas net deferred tax liability1	(359)	(327)	(300)

1. In 2012, the Group applied the new US accounting policy on the recognition of Deferred Acquisition Costs (DAC) which changed the rules on capitalising costs incurred in acquiring insurance business. Applying this retrospectively reduced the opening deferred tax liability on LGA DAC by £76m and the 2011 comparables have been restated accordingly. Details of the adjustment are outlined in note 2.08.

The utilisation of trading losses is partly reflected within the Annuities business where it has contributed £30m in H1 2012 (H1 2011: £33m) to net cash generation. It is expected that trading losses will continue to be available until 2014.

asset exposures and investment variance - Reflects Diversified Portfolio

Investment variances £m	H1 2012	H1 2011
Risk	5	15
Savings	4	4
Investment Management	(2)	(3)
International	13	4
Group capital and financing	(5)	(21)
Asset related investment variances	15	(1)

The Risk investment variance continues to reflect the well matched, diversified nature of the UK annuity portfolio. The Group has undertaken a number of actions since 2008 to reduce the exposure to bank debt and to increase the exposure to sovereign debt, details of which are provided on the following page.

Asset portfolio £bn	H1 2012		FY 2011
	LGPL	Total	LGPL	Total
Bonds:	26.9	33.0	26.3	32.2
Sovereigns:
UK and US	3.0	3.9	3.1	4.0
GIIPS1	0.2	0.3	0.2	0.3
Other countries	0.8	1.8	0.8	1.9
Banks:
UK and US	1.9	2.5	2.2	2.8
GIIPS1	0.1	0.1	0.1	0.1
Other countries	0.6	1.1	0.6	0.9
Other bonds
UK and US	13.7	16.2	13.1	15.6
GIIPS1	0.6	0.7	0.7	0.7
Other countries	6.0	6.4	5.5	5.9
Property	0.6	0.7	0.5	0.6
Equities	-	0.9	-	0.9
Derivatives	2.9	3.1	2.9	3.4
Cash and cash equivalents	0.3	2.4	0.3	2.3
Total Asset Portfolio	30.7	40.1	30.0	39.4
1. GIIPS represents Greece, Italy, Ireland, Portugal and Spain.

The Group has a minimal exposure to GIIPS sovereign debt at £313m (2011 FY: £317m) representing only 0.8% (2011 FY: 0.8%) of the total assets to which shareholders are directly exposed. The majority of the Group's sovereign debt is UK and US holdings representing nearly 65% of the sovereign debt portfolio.

The corporate bond portfolio within Legal & General Pensions Limited (LGPL), the Group's main UK annuity subsidiary, is a geographically diversified portfolio consisting of over 2,000 debt instruments from over 500 issuers. Non-sterling denominated holdings within LGPL are currency hedged to sterling to minimise any foreign exchange risk.

The portfolio is managed based on a forward looking assessment of economic and company specific risks, giving particular consideration to current banking and Eurozone risks, as discussed within the section on the Group's principal risks and uncertainties.

Bank debt now represents only 8.4% of LGPL assets (FY 2011: 9.6%), a significant reduction on the 20.8% held in 2008. Within our bank debt holdings only £78m represents GIIPS bank debt. Whilst bank debt exposures have been reducing, UK sovereign debt exposure has increased to 8.7% (FY 2011: 9.0%) of the portfolio from 2.0% in 2008.

The portfolio continues to diversify into high quality property and commercial lending assets with the aim of improving the risk adjusted yield on the portfolio. These assets now contribute 1.9% (FY 2011: 1.6%) of the total LGPL portfolio, whereas there were no holdings in 2008.

The LGPL credit default provision of £1.6bn (FY 2011: £1.6bn) is equivalent to 60bps (FY 2011: 61bps) of defaults over the life of the portfolio and remains in place to fund against the risk of credit defaults. We have had another six months of no defaults.

Since 2008 we have taken a number of steps to de-risk the Group capital and financing assets to provide more surety over the investment returns. This has resulted in the equity component of the Group capital and financing assets reducing from 30% in 2008 to 20% by H1 2012.

business review - Cash Generation 

PREDICTABILITY of cash generation - Net Cash from Operating Divisions +5%

Sources of the Group's cash generation are transparent and we have used the format below to demonstrate the predictability of these cash flows since 2009.  Operational cash generation from operating divisions (i.e. net of Group capital and financing), remains substantial at £459m (H1 2011: £448m) and net cash from business lines has increased by 5% to £395m (H1 2011: £377m). LGIM represents 24% of the total business net cash generation, further increasing diversification between insurance and asset management. Operational cash generation from the in-force UK Risk and Savings businesses is forecast to grow to c£590m in 2012. In addition we expect With-profits operational cash generation to be c£50m and dividends from our International businesses to be £55m, subject to exchange fluctuations.

	H1 2011				H1 2012				FY 2011			FY 2012
£m	Op cash	Strain	Net cash		Op cash	Strain	Net cash		Op cash			Op cash
Annuities	112	1	113		121	1	122		227
Protection	109	(41)	68		107	(33)	74		232
Insured Savings	53	(31)	22		53	(32)	21		101
In-force cash generation	274	(71)	203		281	(64)	217		560			c.590
With-profits	26		26		26		26		51			c.50
Savings Investments and Other Savings	10		10		9		9		22
GI and Other risk	12		12		7		7		23
LGIM	91		91		97		97		189
International dividends	35		35		39		39		51			c.55
GCF	29		29		12		12		44
Total	477	(71)	406		471	(64)	407		940
Variances and other			(46)				(16)
International (excl. dividends)			7				1
Tax gross up			126				126
Operating profit			493				518

The monetisation of the Group's VIF will form the basis of the future profits and operational cash generation of the UK long-term Risk and Savings businesses.  There is no significant change in the ageing profile of the VIF monetisation profile compared to the 2011 year end, with around 33% of the VIF expected to monetise in the next 5 years.

Reconciliation of UK long term Risk and Savings VIF £bn	Discounted	Undiscounted1
Opening VIF at 1 January 2012	4.25	8.4
Contribution from new business	0.16	0.3
Unwind of discount rate	0.13	-
Expected release from non profit and with-profits businesses2	(0.31)	(0.3)
Closing operational VIF at 30 June 2012	4.23	8.4
Experience variances / assumption changes3	(0.03)	(0.1)
Investment variance / economic assumption changes3	(0.06)	(0.2)
Other	0.04	0.1
Closing VIF at 30 June 2012	4.18	8.2

1. Management estimates.                        2. Comprises the expected release from non profit business of £281m and with-profits transfer of £26m.

3. Explanation of the EEV results is provided in the Supplementary EEV Disclosure section.

CASH GENERATION TO shareholder assets

Total shareholder assets which include Group capital and financing assets and other shareholder assets increased by £0.1bn to £6.0bn (FY 2011: £5.9bn), demonstrating the strong link between our cash metric and shareholder assets in our balance sheet.

Shareholder Assets £m
Opening Group capital and financing assets (including shareholder assets in LGAS and LGPL)	4,344
Opening shareholder assets in other subsidiaries	1,588
Opening shareholder assets at 31 December 2011	5,932
Group operational cash generation	471
New business strain	(64)
Net cash generation	407
External dividend payments in the year	(278)
Other	(23)
Closing Group capital and financing assets (including shareholder assets in LGAS and LGPL)	4,529
Closing shareholder assets in other subsidiaries	1,509
Closing shareholder assets at 30 June 2012	6,038

business review - balance sheet

Capital resources - Stable and Strong Balance Sheet

As at 30 June 2012 the Insurance Group's Directive (IGD) surplus was £3.8bn.

The Group's capital resources totalled £6.9bn, covering the capital resources requirement of £3.1bn by 2.24 times. This capital buffer is in addition to the £1.6bn of LGPL credit default provision.

Capital £bn	H1 2012	FY 2011
Group capital resources	6.9	6.9
Group capital resources requirement	3.1	3.1
IGD surplus1	3.8	3.8
Coverage ratio %	224	220

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

IGD Surplus1 £m
At 1 January 2012	3,769
Operational cash	471
New business strain	(64)
2012 Interim dividend	(116)
Experience variances, assumption changes and other variances	7
Group investment projects	(17)
Investment variance	17
Increase in UK operational regulatory capital requirement	(34)
Release of capital from US capital management programme	-
US temporary capital usage (internal Triple X financing)	(74)
Differences between IFRS and International regulatory reporting	(33)
Other2	(117)
At 30 June 2012	3,809

1. All IGD amounts are estimated, unaudited and after accrual of the interim dividend of £116m (FY 2011: after accrual of the final dividend of £278m).

2. Includes £(30)m resulting from the utilisation of trading losses included in net cash.

capital requirement

Solvency capital is analysed in two components:

1.     Changes to operational capital requirements. This is the result of increases to required capital from new business written in the period less decreases in required capital from in-force business running off. 

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

Pillar 1 capital requirement £bn	H1 2012	FY 2011
Risk	1.7	1.7
Savings	0.1	0.1
With-profits - operational	0.6	0.6
Other subsidiaries	0.4	0.3
Operational group capital resources requirement	2.8	2.7
With-profits insurance capital component (WPICC)	0.3	0.4
Group capital resources requirement	3.1	3.1

GROUP Liquidity - Prudent Approach

Legal & General has a limited appetite for liquidity risk and seeks to maintain at Group level sufficient liquid assets and standby facilities to meet a prudent estimate of the Group's cash outflows over a period of two years. The predicted cash flows are identified through the annual planning processes and take into account the provision of facilities to operational businesses to accommodate their liquidity requirements in extreme stressed scenarios e.g. pandemic and adverse weather events.

Our liquidity position is strong. Cash, including cash equivalents, within the Group's shareholder backed funds was £2.4bn at H1 2012. (H1 2011: £2.3bn).

In 2011 we renewed our £1bn revolving credit facility provided by a diversified syndicate of 21 of the Group's key relationship banks, with the maximum individual commitment ranging from £40m to £51m. We actively monitor the banks participating in the facility based on robust counterparty selection criteria and exposure limits. The facility will mature in 2016 with the option to extend through to 2018. No drawings have been made under this facility to date.

In addition the Group has had in place for over 20 years a Commercial Paper programme, providing the Group with access to short term funds from the domestic sterling and Euro capital markets as and when required.

The Group has no outstanding bonds with maturity or call dates before 2015. There are no restrictive covenants and no credit rating or share price triggers in respect of Group debt or liquidity positions.

 Supplementary EEV disclosure

Analysis of EEV results - covered business £m	PVNBP		Margin (%)		Contribution
	H1 2012	H1 2011	H1 2012	H1 2011	H1 2012		H1 2011
Risk	1,135	1,222	9.6	7.6	109		93
Savings	2,082	2,032	0.6	0.8	12		16
International	794	645	5.8	4.3	46		28
Total	4,011	3,899	4.2	3.5
Contribution from new business					167		137
Expected return from in-force business					223		244
UK Persistency					(1)		2
UK Mortality / morbidity					(11)		(35)
UK Expenses					(28)		37
Other UK experience					45		114
International experience					(43)		(6)
Experience variances and assumption changes					(38)		112
Development costs					(9)		(7)
Contribution from shareholder net worth					72		95
Operating profit on covered business					415		581
Business reported on an IFRS basis					41		53
Operating profit					456		634
Analysis of EEV results - worldwide business £m						H1 2012		H1 2011
Risk						263		344
Investment Management						106		104
Savings						41		94
International						58		87
Group capital and financing						11		30
Investment projects						(23)		(25)
Operating profit						456		634
Variation from longer term investment return						(13)		(31)
Effect of economic assumption changes						(126)		(13)
Property gains/(losses) attributable to non-controlling interests						1		(1)
Profit from ordinary activities before tax						318		589
Tax and other						(2)		17
Profit from ordinary activities after tax						316		606
Earnings per share (p)						5.40		10.42
						H1 2012		FY 2011
Shareholders' equity						8,581		8,608
Number of shares (m)						5,906		5,872

operating profit

The reduction in EEV operating profit to £456m (H1 2011: £634m) reflects significant positive one-offs in the prior year. In 2011 experience and assumption changes were £112m with £(38)m in 2012. The negatives in 2012 include £(13)m from a small number of high value mortality claims in the US and £(24)m from one-off modelling changes. New business contribution increased to £167m (H1 2011: £137m) and there were reduced expected returns on the VIF and SNW from the lower opening risk free rate in the year of 2.5% (H1 2011: 4.0%).

New business contribution

Contribution from new business increased by 22% to £167m (H1 2011: £137m) as a result of higher sales and better margins, which improved to 4.2% (H1 2011: 3.5%) benefitting from improved protection margins in both the UK and US.

New business MARGINS

risk

New business margin %	H1 2012	H1 2011
Protection	10.8	6.4
Annuities	8.5	8.4
Risk	9.6	7.6

For the FY 2011, we reported a significantly improved protection new business margin of 9.3%. Strong cost management and our largely automated underwriting model have enabled further progression of the new business margin to 10.8% (H1 2011 6.4%).

The Annuities new business margin remained in line with the previous year at 8.5% (H1 2011: 8.4%). Given positive strain on this business, Annuities had an immediate IFRS payback and an infinite IRR at both H1 2012 and H1 2011. The IRR on protection new business was greater than 15% (H1 2011: greater than 15%) with an improved payback period of 3 years (H1 2011: 4 years).

savings

New business margin %	H1 2012	H1 2011
Unit linked bonds	0.8	1.6
Non profit pensions	0.4	0.2
With-profits	1.2	1.8
Savings	0.6	0.8

The unit linked bond margin of 0.8% (H1 2011: 1.6%) reflects lower sales in on-shore bonds and a shift in fund mix to lower margin fund choices. This translates into an IRR of 8% (H1 2011: 13%) and a payback period of 8 years (H1 2011: 6 years).

The non profit pensions margin of 0.4% (H1 2011: 0.2%) reflects the delivery of higher sales and unit cost efficiencies. This equates to an IRR of 8% (H1 2011: 8%) and a payback period of 11 years (H1 2011: 12 years).

The With-profits margin has reduced to 1.2% (H1 2011: 1.8%), reflecting lower assumed investment returns compared to the previous year.

international

New business margin %	H1 2012	H1 2011
USA	10.9	9.8
Netherlands	0.9	-
France	1.0	0.8
International	5.8	4.3

The increase in International margin reflects the improvement in the USA and Netherlands margins in the period. In the USA the margin is in line with the 2011 full year margin of 10.7%, whilst the Netherlands margin has benefited from increased individual protection sales in the year.

EEV EXPERIENCE VARIANCES AND ASSUMPTION CHANGES

Overall experience and assumption changes are £(38)m compared to £112m in the previous year. The negatives in 2012 include £(13)m from a small number of high value mortality claims in the US and £(24)m from one-off modelling changes.

Investment management

The Investment Management business is reported on an IFRS basis; operating profit of £106m (H1 2011: £104m) excludes £13m (H1 2011: £13m) 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 and Savings covered businesses on an EEV basis.

Group Capital and financing

The Group capital and financing operating profit primarily reflects the smoothed investment return on the shareholder net worth and shareholder assets held at Group level less interest charges on Group debt. The profit from Group capital and financing reduced to £11m in 2012 (H1 2011: £30m) due to a fall in the assumed returns on equities to 5.8% (H1 2011: 7.5%) and a higher proportion of Group capital and financing assets held in cash during H1.

investment variances and economic assumption changes

The variation from the longer term investment return was small during the period at £(13)m (H1 2011: £(31)m). The Group continues to operate a well matched and diversified annuity portfolio. Differences arise between the EEV and IFRS investment variances for a number of reasons including EEV presenting the impact of economic assumption changes separately from investment variances and also due to the annuity portfolio being matched on an IFRS basis.

The effect of economic assumption changes of £(126)m (H1 2011: £(13)m) reflects the impact of the fall in interest rates on assumed returns, changes to the shape of the LIBOR swap curve and the increase in the EEV risk margin from 3.7% to 3.8%. This is only partially offset by the reduction in the risk discount rate from 6.2% to 6.1%.

EEV PER SHARE

The Group has delivered £316m (H1 2011: £606m) of EEV profit after tax, which after external dividend payments of £278m and foreign exchange, pension deficit and other adjustments of £(65)m, marginally reduced EEV shareholders' equity to £8,581m (FY 2011: £8,608m).

The number of shares increased to 5,906m (FY 2011: 5,872m) from the vesting of 3 year Save As You Earn (SAYE) options. These options were granted to our employees in 2009 at 36p.

This movement in equity coupled with the increase in the number of shares equates to a shareholder's equity per share of 145 pence (FY 2011: 147 pence).

ADDITIONAL VALUE OF LGIM

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

The external assets element of the Investment Management business is included at the IFRS net asset value of £0.4bn (FY 2011: £0.4bn), equivalent to 7p per share (FY 2011: 6p per share).

Calculating the external assets element of LGIM on an embedded value basis, using assumptions detailed below, would increase the contribution of LGIM to Group embedded value from £0.6bn (11p per share) to £1.8bn (31p per share). This excludes any value for LGIM's new business franchise.

Estimated LGIM discounted cash flow valuation	H1 2012 (p per share)	H1 2012 £bn
Look through value of profits on covered business	4	0.2
Net asset value	7	0.4
Current value of LGIM in Group embedded value	11	0.6
LGIM VIF	20	1.2
Alternative discounted value of LGIM future cash flows	31	1.8

Including LGIM this scenario equates to an indicative valuation per share of 165 pence.

Indicative valuation including LGIM	H1 2012 (p per share)	H1 2012 £bn
EEV as reported	145	8.6
LGIM VIF	20	1.2
Total including LGIM	165	9.8

Principal risks and uncertainties

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

PRINCIPAL UNCERTAINTY AND POTENTIAL IMPACT Changes in regulation or legislation may have a detrimental effect on our strategy or profitability. Legislation and government fiscal policy can influence our product design, the retention of existing business and our required reserves for future liabilities. Regulation defines the overall framework for the design, marketing and distribution of our products and the prudential capital that we hold. The nature of long-term business can result in certain regulatory changes having a retrospective effect.

MITIGATION We base our business strategy upon prevailing regulation and legislation, and known or anticipated change. To mitigate the risk that changes in legislation or regulation may have adverse or unintended impacts, we seek to engage with regulatory and legislative authorities to assist in the evaluation of change, and develop outcomes that meet the needs of all stakeholders. Current areas of uncertainty include: the regulatory implementation of Solvency II; the timetable and form of changes arising from International Financial Reporting Standards (IFRS) 4 Phase 2; and the transition of the FSA into the Prudential Regulatory Authority and Financial Conduct Authority. We also continue to work with our business partners in their transition to the Retail Distribution Review regime.

financial market and economic conditions

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

The outlook for the UK economy continues to remain uncertain. Economic growth has been subdued with no sign of a sustained recovery. As well as impacting domestic economic conditions, ongoing concerns for the stability of the Eurozone continue to drive volatility in investment markets. Until Eurozone governments are able to find a definitive solution to Euro stability issues, it is likely these conditions will continue, with the potential for shock events, such as bank defaults or countries exiting the Euro. We continue to actively monitor the impact of the Eurozone crisis on our businesses and the adequacy of our contingency plans. More broadly, our business plans have been structured to take account of alternative projected economic conditions with focus on markets that will be resilient in the projected conditions.

industry change

The Group may not maximise opportunities from structural and other changes within the financial services sector. The financial services sector continues to go through a period of change. This presents a range of challenges as well as opportunities to providers of sufficient scale such as Legal & General.

Significant changes in the markets in which we operate may require the review and realignment of elements of our business strategy. A failure to be sufficiently responsive to potential change and understand the implication to our businesses, or the incorrect execution of change may impact the achievement of our strategic objectives. We seek to ensure we have market leading expertise in the core fields in which we operate, and actively focus on retaining the best personnel with the knowledge to design and support our products, and to manage their evolution as market and consumer requirements change.

Counterparty and third party risks

In dealing with issuers of debt and other types of counterparty the Group is exposed to the risk of default As part of our strategies to match long-term assets and liabilities, exposures arise to the issuers of corporate debt and other financial instruments. We also have exposures to banking, money market and reinsurance counterparties, and the providers of settlement, custody and IT services.

We actively manage our exposure to default risk, setting robust counterparty selection criteria and exposure limits However, market reaction to a significant default event could result in the short term reduction in the market value of corporate bond assets held in respect of our Annuities business and in extreme circumstances may require an increase in default provisions for potential or actual defaults. A failure by a key service provider may result in short term operational disruption of our business processes.

UK Financial Services Sector Contagion Risks

As a UK-based Group, our earnings are influenced by the performance and perception of the UK financial services sector as a whole Investment market performance, actions by regulators against organisations operating in the financial services sector and shock events can impact the confidence of customers in the sector as a whole. Such events may also result in changes to the regulatory and legislative environment in which we operate.

We manage our brand and reputation and seek to differentiate our business model from that of our competitors, focusing on our customers' needs through a diversified portfolio of Risk, Savings and Investment Management businesses. In addition, we continue to focus on developing our International businesses. Where events lead to proposals to change the environments in which we operate, we seek to engage with regulators and legislators at a UK and European level to assist in the evaluation of change and influence the development of outcomes that meet the needs of all stakeholders.

Mortality, Catastrophe and other assumption uncertainties

Reserves for long-term  business may require revision as a result of changes in experience, regulation or legislation The writing of long-term insurance business necessarily requires the setting of assumptions for long-term trends in factors such as mortality, persistency, valuation interest rates, expenses and credit defaults. Extreme events may require recalibration of these assumptions. Changes in reserves can also be necessary as a result of changes in regulation or legislation.

Our product pricing assumptions for Annuities, protection and other insurance business reflect our assessment of the risks to which we consider we are exposed. We undertake significant analysis of longevity and mortality risks to ensure that an appropriate premium is charged for the risks we accept, and that our reserves remain appropriate.  We also seek continually to improve our understanding and processes for evaluating the risks from writing insurance business. We continue to highlight to legislators the benefits to consumers of insurers being able to price insurance products on the risks implicit in that business.

business process risks

A material failure in our business processes may result in unanticipated loss or reputation damage Our business processes can be complex, with significant reliance placed upon IT systems and processes to support the administration of our products, the modelling of liabilities and capital requirements, and the reporting of our financial performance.

We have constructed our framework of internal controls to minimise the risk of unanticipated loss or damage to our reputation, with continual review as part of our operational risk management processes. Our internal audit function also provides independent assurance on the adequacy and effectiveness of our controls. However, no system of internal control can completely eliminate the risk of error, financial loss, fraudulent actions or reputational damage.

Enquiries

Investors:
Kate Vennell	Head of Investor Relations	020 3124 2150
Ian Baker	Investor Relations Manager	020 3124 2047
Media:
John Godfrey	Group Communications Director	020 3124 2090
Richard King Anastasia Shiach	Head of Media Relations Tulchan Communications	020 3124 2095 020 7353 4200
Michelle Clarke	Tulchan Communications	020 7353 4200

Notes

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

A presentation to analysts and fund managers will take place at 09.30 BST today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of the presentation which can be accessed at

http://investor.legalandgeneral.com/results.cfm. A replay will be available on this website later today.

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

Country You Are Dialling In From		Number You Should Dial
United Kingdom	020 3059 8125
All other locations	[phone]
Conference Entry via QR Code	To gain access to the conference using the QR code, please ensure you have the appropriate software on your mobile device and scan the image.

A replay will be available on this website later today.

United Kingdom	0121 2604 861
All other locations	+ 44 121 2604 861

PARTICIPANT PIN:  2495500 FOLLOWED BY #

Ex dividend date	29 August 2012
Record date	31 August 2012
Payment date of 2012 interim dividend	1 October 2012
Q3 Interim Management Statement 2012	1 November 2012
Preliminary Results 2012	6 March 2013

Forward looking statements

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

going concern statement

The Group's business activities, together with the factors likely to affect its future development, performance and position in the current economic climate are set out in this Interim Management Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Group Results. Principal risks are detailed on page 24. In addition, the financial statements include, amongst other things, notes on the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.

The 2012 economic climate remains uncertain. However, based on the available information on the future, the directors consider that the Group has the plans and resources to manage its business risks successfully as it has a diverse range of businesses and remains financially strong.

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

Directors' Responsibility statement

We confirm to the best of our knowledge that:

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

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

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

iv.   The European Embedded Value basis consolidated income statement, the consolidated statement of comprehensive income and the consolidated balance sheet and associated notes have been prepared on the European Embedded Value basis as set out in Note 5.21; and

v.    The directors of Legal & General Group Plc are listed in the Legal & General Group Plc Annual Report for 31 December 2011, except Tim Breedon who ceased to be an executive director of the company on 30 June 2012. A list of current directors is maintained on the Legal & General Group Plc website: legalandgeneralgroup.com.

By order of the Board

N. D. Wilson                                     

Group Chief Executive

J.B Pollock

Chief Executive Officer (Risk)             

6 August 2012            

NOTES

 

END

 

 

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