Interim Results 2004 - Part 1

Legal & General Group PLC 29 July 2004 Stock Exchange Release - Part 1 29 July 2004 Legal & General Group Plc ========================= Interim results for the six months to 30 June 2004 ================================================== • Second quarter UK new business up 27% on 2003 • Record half year for fund management new business at £8.7bn • Group funds under management exceed £148bn • Financially strong - significantly increased with-profits realistic surplus • Dividend increased by 2.5% to 1.61p per share Group Chief Executive, David Prosser, said: 'These are encouraging results. New business has grown strongly across almost all areas of the Group. Although the annuity reserving changes have held back pre-tax profits, underlying profit performance has been good. Legal & General is one of the strongest companies in the sector and is well positioned to benefit from the opportunities the market offers. We have had a good first six months; we believe that once again we have taken market share profitably and we expect to continue to do so.' Summary of results ------------------ Achieved Profits basis Modified Statutory Solvency basis 1H 04 1H 03 1H 04 1H 03 Operating profit £292m(1) £365m £284m £258m Shareholders' funds £5,723m £5,260m £3,198m £3,259m Earnings per share (diluted) (2) 3.20p 3.92p 3.08p 2.75p Worldwide new business APE (3) £511m £453m £511m £453m Contribution from new business (4) £151m £150m N/A N/A Interim dividend per share 1.61p 1.57p 1.61p 1.57p Notes: (1) After a charge of £240m from the previously announced adoption of more conservative mortality experience assumptions for annuity business. (2) Based on operating profit after tax and assuming full dilution from the convertible bond issued in 2001. (3) Annual Premium Equivalent (APE) is total new annual premiums + 10% of single premiums, including ISAs and unit trusts. (4) Contribution before tax from new worldwide life and pensions business. The Achieved Profits results are based on the methodology issued by the Association of British Insurers in December 2001. Full details of the results can be found in Parts 2 (Achieved Profits), 3 (MSS) and 4 (Legal & General Investment Management). UK overview and outlook ----------------------- Returning consumer confidence and continued success in building distribution are, we believe, the prime reasons behind the second quarter growth in our UK business. New business APE was 27% above the corresponding period last year and 35% ahead of the first quarter this year. Strongest growth in retail business has come from the IFA sector where the increased effort referred to last year has delivered excellent results, particularly from investment products. This brought new business from this channel to £234m APE (1H03: £188m), an increase of nearly 25%. In our Business Partnerships division, which recorded new business of £118m APE (1H03: £123m), mortgage-related protection business remained the strongest area of sales. There has been some change in product mix over the last year. Overall, bond sales increased as demand for unit linked products has grown significantly but with-profit bond sales fell. Bulk purchase annuity sales, which are lumpy, were down by more than a third from last year. Continued pricing discipline resulted in a return on capital of 19% on new UK life and pensions business. Primarily as a result of changes in the mix of business the value to premium ratio fell from 46% in 2003 to 40% in the first half of 2004. We believe the market outlook is encouraging. Protection sales are expected to remain buoyant and we believe individual investors will increasingly look to bonds and equities for their long-term savings. At the same time, we expect pricing discipline to be maintained. The Government and the FSA are consulting on a series of proposals, which if implemented, will have a significant impact on our industry's products and distribution. We believe the sector consolidation will continue and this will continue to provide Legal & General with good opportunities to achieve further profitable growth. We have the combination of products, brand, financial strength, distribution and experience to be able to take full advantage of the opportunities ahead. Analysis of new business (APE) ------------------------------ 1H 04 1H 03 2Q 04 2Q 03 £m £m £m £m UK life and pensions: - individual 277 231 146 116 - group 62 52 39 19 ------- ------- ------- ------- - total 339 283 185 135 UK ISAs and unit trusts 115 122 76 70 ------- ------- ------- ------- Total UK 454 405 261 205 International 57 48 35 25 ------- ------- ------- ------- Worldwide (including unit trusts) 511 453 296 230 ------- ------- ------- ------- New institutional fund management 8,743 5,980 3,312 3,152 UK new business --------------- Strong growth in demand for both retail and group business in the second quarter resulted in a 27% growth in new business over the corresponding period last year and 35% growth on the first quarter of 2004. During the half-year, new business volumes grew by 12% to £454m APE (1H03: £405m). Within this figure, new life and pensions business grew by 20% to £339m APE (1H03: £283m). Individual life --------------- Annual premium sales continued to benefit from the strong position we have built up in the life protection market, growing by 10% to £78m (1H03: £71m). Single premium bond sales were 59% higher at £820m (1H03: £515m). Unit linked bond sales more than trebled offsetting lower with-profits sales. Individual pensions ------------------- Individual pension business made further progress, with annual premiums increasing by 7% to £61m (1H03: £57m) and single premium new business up 9% to £562m (1H 03: £516m), benefiting from growth in pensions transfers and individual annuity sales. ISAs and Unit trusts -------------------- Investment sales in the second quarter, which benefited from increased demand from both retail and institutional investors, grew from £39m APE in the first quarter to £76m. Despite the second quarter increase, sales in the first half of the year as a whole declined by 6% to £115m APE (1H03: £122m). Although regular payment business fell to £14m (1H03: £19m), single payment sales held up at £1,010m (1H03: £1,025m). Group business -------------- Group new business increased by 19% to £62m APE (1H03: £52m). We have benefited from strong growth in group risk premiums as the market concentrates on a smaller number of providers. Bulk purchase annuity single premiums were higher in the second quarter than the first but over the first half were still below the corresponding period last year at £230m (1H03: £367m). Analysis of profit - Achieved Profits Basis ------------------------------------------- 1H 04 1H 03 £m £m Profit on continuing operations: UK life and pensions 165(1) 260 International life and pensions 40 46 Institutional fund management 50 37 General insurance 20 19 Other operational income 17 3 ------- ------- Operating profit 292(1) 365 Variation from longer term investment return 88 86 Change in equalisation provision (4) (4) Effect of economic assumption changes (11) (8) Effect of UK Budget tax changes - (27) ------- ------- Profit on ordinary activities before tax 365(1) 412 ------- ------- Diluted earnings per share 3.20p 3.92p (Based on operating profit after tax) (1) After a charge of £240m from the previously announced adoption of more conservative mortality experience assumptions for annuity business. UK life and pensions profit --------------------------- Operating profit was £165m (1H03: £260m). The contribution from in-force business fell by £240m pre tax as a result of the more conservative annuitant mortality assumptions announced on 2 July. This was partly offset by other operating assumption changes of £28m and by favourable experience variances of £40m. Strong growth in life and pensions volumes enabled the new business contribution before tax to grow to £134m (1H03: £131m) despite the adoption of the more conservative annuitant mortality assumptions previously announced. Although pricing discipline was maintained, the combination of business mix and these revised assumptions caused the contribution, expressed as a percentage of APE, to fall to 40% (1H03: 46%). International life and pensions ------------------------------- Operating profit from international life and pensions business was £40m (1H03: £46m), including a new business contribution of £17m (1H03: £19m). The contribution from in-force business was £18m (1H03: £20m). In the USA, new business was broadly stable in sterling terms at £27m APE (1H03: £28m) but increased 7% in local currency terms. Operating profit was £18m (1H03: £28m) as the level of claims exceeded the assumed level. The new business contribution, as a percentage of APE, was 25% (1H03: 41%) as the Triple X reserves were carried directly, pending the completion of a financing arrangement to supplement the existing reinsurance arrangements. New business volumes in Europe were resilient and, including retail investment business, grew to £30m APE, (1H03: £20m). The result in the Netherlands was driven mainly by growth in single premiums and in France good progress was made in life and pensions sales. The operating profit was £15m in the Netherlands (1H03: £14m) and £7m in France (1H03: £4m). The combined contribution from new business was £10m (1H03: £7m). Legal & General Investment Management ------------------------------------- Legal & General Investment Management maintained its impressive track record, winning a further £8.7bn of new funds in the first half of 2004 (1H03: £6.0bn), with particularly strong performance in the first quarter. We continued to win an increasing number of bond mandates for both active and indexed management. The profit from our fund management business grew by 35% to £50m (1H03: £37m), with improved results for both new and in-force business for managed pension funds and an increased contribution of £6m (1H03: £5m) from venture capital and other external clients. The contribution from new business from managed pension funds was £17m (1H03: £12m) reflecting the significant increase in new business volumes. Group funds under management grew to a record £148bn at 30 June 2004 (30 June 2003: £124bn). Funds under management by Legal & General Investment Management were £146bn (30 June 2003: £123bn). Further information on the performance of Legal & General Investment Management can be found in Part 4 of this announcement. General insurance ----------------- Net written premiums grew 17% to £215m (1H03: £184m) as the existing joint venture with the Woolwich was extended further to customers of Barclays Bank. Legal & General is now one of the top five household insurers in the UK. The household account, which represents nearly 80% of net premiums written, produced an increased operating profit of £13m (1H03: £10m). The total operating profit at £20m (1H03: £19m) reflected a lower profit from other business as the contribution from the mature mortgage indemnity book continues to decline. Other operational income ------------------------ Other operational income comprises the longer term investment return arising from investments held outside the UK long term fund, interest expense, unallocated corporate expenses and the results of the Group's other operations. The significantly increased contribution of £17m (1H03: £3m) reflects an improved investment return and a reduced loss of £1m (1H03: £11m loss) from our retail investment business. Profit on ordinary activities ----------------------------- The Group's operating profit on continuing operations before tax was £292m (1H03: £365m). The profit from ordinary activities before tax, which includes the effect of variances in investment return from the longer term return assumed at the end of 2003, was £365m (1H03: £412m). The investment return on the equity and property portfolio of the UK long term fund was 0.9% above the assumption for the period (1H03: 2.8% above assumption). Balance sheet ------------- At 30 June 2004, the embedded value of the Group's long term businesses was £5,329m (31 December 2003: £5,215m). At 30 June 2004, shareholders' funds on the Achieved Profits basis amounted to £5,723m (31 December 2003: £5,584m), equivalent to 88p per share (31 December 2003: 86p per share). This increase of 2.5% was achieved after providing for both the 2004 interim dividend of £104m and the revised mortality assumptions. Analysis of profit - Modified Statutory Solvency (MSS) basis ------------------------------------------------------------ 1H 04 1H 03 £m £m Profit on continuing operations: Life and pensions operating profit 215 211 Institutional fund management 32 25 General insurance 20 19 Other operational income 17 3 ------- ------- Operating profit 284 258 Variation from longer term investment return (26) 20 Change in equalisation provision (4) (4) Change in shareholder retained capital (SRC) (170) (30) ------- ------- Profit before tax 84(1) 244 ------- ------- Diluted earnings per share 3.08p 2.75p (Based on operating profit after tax) (1) After a charge from the previously announced adoption of more conservative mortality reserving assumptions for annuity business, which was partly offset by other releases. Operating profit was £284m (1H03: £258m), reflecting improved results from all business areas. The UK life and pensions operating profit before tax was £178m (1H03: £174m), as the impact of lower levels of with-profit bonuses was more than offset by an increased transfer from the growing book of non profit business. The accrued transfer from non profit business has been calculated as a smoothed investment return on the shareholder net worth and the embedded value of non profit business, augmented by the distribution in respect of the intra-group subordinated debt capital attributed to the SRC. The external servicing cost of the related debt has been reflected in interest expense reported within other operational income. The operating profit from our overseas life and pensions businesses was unchanged at £37m with a reduced contribution from the USA offset by increased profits from Europe. Legal & General Investment Management saw strong growth in statutory profits. These increased by 28% to £32m (1H03: £25m) reflecting a combination of higher volumes, higher market levels and tightly controlled costs. Adopting the more conservative reserving basis for UK annuity business announced on 2 July led to a reduction in SRC of £290m net of tax. However, this reduction was partially offset by releases from other reserves, together with the impact of improved asset/liability matching and other actions. In aggregate, the movement in SRC was a pre tax reduction of £170m (1H03: a reduction of £30m). This reflected the impact of reduced investment returns, the net capital invested in non profit business of £91m (including the effect of the reserving changes outlined above) and the transfer to shareholders from non profit business. Capital strength ---------------- Legal & General continues to be one of the strongest companies in its sector. Reserves are reviewed regularly to ensure an appropriate level of prudence is used in each product area. Our capital position underpins our ability to continue to grow new business volumes profitably. At 30 June 2004, the value of the assets supporting the UK with-profits business was estimated to have exceeded realistic liabilities by £1.0bn. The Risk Capital Margin (RCM) required has reduced from £960m at 31 December 2003 to an estimated £400m at 30 June 2004 mainly as a consequence of a change in investment policy for those assets in the with-profits fund which are held over and above asset shares. The investment policy for asset shares remains unchanged. The RCM has been calculated on the basis of ABI guidance used at the year end except that, more prudently, a full 20% equity stress test has been used. The RCM was covered 2.5 times by the realistic with-profits estate and at least 10 times by the total surplus assets in Legal & General Assurance Society. As at 30 June 2004, the Form 9 ratio for Legal & General Assurance Society was 14.0% (31 December 2003: 13.0%). This includes an implicit item of £1.0bn but makes no use of the realistic waivers granted by the FSA last year. Excluding the implicit item, the ratio was 11.5%. The ratio at 30 June reflects the more conservative mortality basis adopted for annuity business, the impact of which was more than offset by a reduction in the required resilience reserves. Payment of dividend ------------------- The interim dividend of 1.61p per share will be paid on 1 October 2004 to shareholders registered at the close of business on 10 September. The shares go ex-dividend on 8 September. A Dividend Re-investment Plan is available to shareholders. Enquiries to: ------------- Investors: ---------- Andrew Palmer, Group Director (Finance) 020 7528 6286 Peter Horsman, Head of Investor Relations 020 7528 6362 Media: ------ John Morgan, Head of Public Relations 020 7528 6213 Anthony Carlisle, Citigate Dewe Rogerson 07973 611888 Notes: - These financial statements have been reviewed by PricewaterhouseCoopers LLP and prepared in conjunction with our consulting actuaries - Tillinghast Towers-Perrin and, in the USA, Milliman USA. - Issued share capital at 30 June 2004 was 6,505,016,878 shares of 2.5p each. - A copy of this announcement can be found in the News and Results section of our Shareholder site at http://investor.legalandgeneral.com/releases.cfm - The results presentation to analysts and fund managers will also be available later today at http://investor.legalandgeneral.com/presentations.cfm Financial Calendar: ------------------- Ex dividend date for interim dividend 8 September 2004 Record date for interim dividend 10 September 2004 Payment date for interim dividend 1 October 2004 Third quarter 2004 new business results 20 October 2004 This information is provided by RNS The company news service from the London Stock Exchange

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