L&G 2007 FY Results Part 1

Legal & General Group Plc 18 March 2008 Page 1 LEGAL & GENERAL GROUP PLC PRELIMINARY RESULTS 2007 18 March 2008 Robust results - £269m(1) longevity strengthening - strong platform for increased shareholder value =================================================================================================== Financial --------- • EEV and IFRS profits(2) lower in 2007 after annuitant longevity assumption strengthening and major one-off benefits in 2006 EEV operating profit £912m (2006: £1,233m) IFRS profit after tax £718m (2006: £1,631m) Longevity strengthening of £269m (EEV basis), £214m (IFRS basis) • Strong efficient balance sheet High quality credit portfolio AA+ financial strength (Legal & General Assurance Society Limited) Capital review added a further £322m to embedded value in 2007 £1bn share buyback ongoing, £516m completed as at 29 February 2008 • Recommended full year dividend up 7.6% to 5.97p (2006: 5.55p) Dividend underpinned by strong cash flow and future prospects Business -------- • Good performance from Risk business Leading market player in individual and group protection Strong growth in pension buy-outs • Savings business - growth opportunity Strong growth in pensions sales: up 20% Bond volumes affected by market volatility and CGT change • Strong Investment management performance £53bn in LGIM(3) new business, £297bn total LGIM funds under management Investment management operating profit up 17% to £155m on IFRS basis (2006: £133m) • International businesses International business operating profit up 15% to £86m on IFRS basis (2006: £75m) Growing international reach: Bank of Baroda and Andhra Bank (India) shareholders agreement on joint venture signed • Distribution Nationwide Building Society distribution agreement now live 1. Pre-tax, EEV basis 2. Under IFRS, UK reserving changes and other adjustments contributed £869m in 2006 against just £51m in 2007 3. Legal & General Investment Management Limited ======================================================================================================================== Page 2 Group Chief Executive, Tim Breedon, said: ----------------------------------------- 'Legal & General has delivered a robust set of financial results. Headline numbers are lower, but taking into account the significant positive regulatory and reserving changes in 2006, and the £269m of longevity strengthening this year, the business has performed consistently over the past two years. 'The Risk business remains a market leader in its field, the Savings business is well positioned for future growth and Legal & General Investment Management is a proven winner. 'We have completed the major components of our Capital review this year. Our strong and efficient balance sheet provides us with the levers to drive future growth and shareholder value. As at 29 February, £516 million of our £1 billion share buyback has been completed and the programme continues. We are increasing our dividend by 7.6% to 5.97p, and this is strongly underpinned by cashflow. The strength of our balance sheet is unimpaired by the credit crunch. We have no material exposure to credit-impaired securities and our AA+/Aa1 financial strength ratings are unchanged. 'Our outlook is positive for the Risk business. The 'new' pension buy-out market is developing rapidly, and our quotation activity in this area has never been greater. Our partnership with Nationwide Building Society is now live and is already delivering increased new protection business in line with our expectations. We grew our savings business strongly and we continue to focus on improving margins. We have scale, breadth and distribution capability on which we intend to build in 2008. 'Legal & General's distinguishing characteristics of capital strength, breadth and diversity of product and distribution position us well to deliver long-term growth and shareholder value in 2008.' Business Commentary ------------------- Legal & General has three businesses: Risk, Savings and Investment management. Risk - Strong performance from protection and annuities The risk business includes group and individual protection, annuities and general insurance. Annuities delivered record business volumes in 2007. As we have predicted, the 'new' market for pension buy-outs is growing strongly as it is being used by a wider variety of schemes. We wrote over £1.1bn of single premium in 2007 and have established expertise in pricing and structuring buy-outs. This positions us well in a business which has the potential to grow exponentially, and where we intend to continue to be a key player. In protection, Legal & General has expanded its distribution and diversified its product range away from housing related sales, consequently new business volumes remained resilient in 2007 despite the slowing housing market. Savings - Building for the future Whilst markets have seen a high degree of turbulence we have increased sales in most of our core products (individual pensions, corporate pensions, unit trusts and ISAs). We see the Savings market as a growth area driven by an increasing number of mass affluent and high net worth clients. The market is evolving rapidly. Customers' requirements change over their lifetime. Flexibility in fund choice and tax wrapper is vital for customers' interests, and encourages them to stay with us for the long term, and it is here that we are focusing our business investment. Few companies can match our scale, breadth of product range and distribution and we therefore believe we are well placed to grow our assets under administration. Investment management - £53bn in LGIM new business wins LGIM delivered outstanding performance in 2007. Gross new fund inflows were £53bn, with total funds under management at the year end of £297bn. LGIM is now one of the largest asset managers in the UK. Our core product offering and acclaimed client service continue to resonate with the investment marketplace. The provision of structured solutions to UK corporate pension funds continues to grow in an attractive market. ======================================================================================================================== Page 3 Distribution ------------ Legal & General's multi-channel distribution includes independent financial advisers, tied agents, bank and building society partners and direct sales. We regard diversity of distribution as very important, as it increases our flexibility to respond to market conditions. The Nationwide Building Society distribution partnership launched on 1 February 2008, providing us with access to over 13 million members. Last year, through our Mortgage Club, we were an involved in 6% of all mortgage transactions in the UK, with a total value of £23bn. This gives us unparalleled access to thousands of customers at a point when many long-term financial decisions about protection or savings are being made. We continue to invest in new distribution technology, particularly through our strategic relationship with the UK's largest independent investment platform Cofunds (£14bn assets under administration at 29 February 2008), with whom we recently extended our relationship to supply a wider range of products going forward. Dividend -------- Legal & General's Board is recommending a final dividend of 4.10p. With the interim dividend of 1.87p announced in July 2007, this will bring the full year dividend for 2007 to 5.97p, an increase of 7.6%. The Company's recommended dividend is based on a thorough review of the Company's financial strength, future capital requirements and current and future investment market conditions, and a continued commitment to a strong credit rating and profitable growth. Outlook ------- We anticipate further market share growth in protection. Our protection business will benefit from the Nationwide Building Society distribution agreement. The start of 2008 has been encouraging given the lower housing market activity. In annuities, the 'new' pension buy-out market has arrived and quotation activity for new schemes is very strong. Savings market conditions in 2008 are likely to be more testing than in 2007. Equity market volatility coupled with CGT uncertainty may dampen short term market growth. We are, nevertheless, confident that we have put in place the building blocks to grow our savings funds at a faster rate than the market. The year has started well for LGIM and it continues to attract funds from corporate, local authority pensions and other institutional clients. We expect 2008 will be a challenging year for the economy and for the industry. Legal & General has shown in the past that it can build profitable market share in tougher trading conditions. We expect our combination of balance sheet strength, quality products and broad distribution to enable us to continue to deliver long-term growth and shareholder value. Enquiries --------- Investors: Jonathan Maddock Head of Investor Relations 020 3124 2150 Nicola Marshall Investor Relations Manager 020 3124 2151 Ching-Yee Chan Investor Relations Co-ordinator 020 3124 2345 Media: John Godfrey Group Communications Director 020 3124 2090 Richard King Head of Media Relations 020 3124 2095 Anthony Carlisle Citigate Dewe Rogerson 07973 611888 ======================================================================================================================== Page 4 Notes ----- • Issued share capital at 31 December 2007 was 6,296,321,160 shares of 2.5p. • A copy of this announcement can be found in 'Results', under the 'Financial information' section of our shareholder website at http://investor.legalandgeneral.com/investors/results.cfm. • A presentation to analysts and fund managers will take place at 09.30 GMT today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of the presentation which can be accessed at http://investor.legalandgeneral.com/investors/results.cfm. A replay will be available on this website later today. • There will be a live listen only teleconference link to the presentation. UK investors should dial 0800 953 0844 and overseas investors should dial +44 (0)1452 562 716. The conference ID number is 39176483. Basis of preparation -------------------- The European Union requires all listed companies to prepare their consolidated financial statements using standards issued by the International Accounting Standards Board as adopted by the European Union. The Group's statutory results have therefore been reported on an International Financial Reporting Standards basis. The Group's directors continue to believe that the supplementary accounts prepared using European Embedded Value principles provide shareholders with a good understanding of the value which has been generated by the Group. The following financial statements were approved by a sub-committee of the Board on 17 March 2008 and constitute non statutory accounts within the meaning of Section 240 of the Companies Act 1985. The Group's financial statements for 2007 include the auditors' unqualified report and do not contain a statement under either Sections 237(2) or 237(3) of the Companies Act 1985. Financial calendar 2008: ------------------------ Event Date ======================================================================================================================== Ex-dividend date for 2007 final dividend 16 April 2008 ------------------------------------------------------------------------------------------------------------------------ Q1 2008 new business results 16 April 2008 ------------------------------------------------------------------------------------------------------------------------ Annual General Meeting 14 May 2008 ------------------------------------------------------------------------------------------------------------------------ Payment date of 2007 final dividend (to members registered on 18 April 2008) 19 May 2008 ------------------------------------------------------------------------------------------------------------------------ 2008 interim results and Q2 2008 new business results 5 August 2008 ------------------------------------------------------------------------------------------------------------------------ Ex-dividend date for 2008 interim dividend 3 September 2008 ------------------------------------------------------------------------------------------------------------------------ Payment date for 2008 interim dividend (to members registered on 5 September 2008) 1 October 2008 ======================================================================================================================== A Dividend Re-investment Plan is available to shareholders. Forward-looking statements -------------------------- This document may contain certain forward-looking statements with respect to certain of Legal & General Group Plc's plans and its current goals and expectations relating to future financial condition, performance and results. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Legal & General Group Plc's control, including, among others, UK domestic and global economic and business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition and the policies and actions of governmental and regulatory authorities and the timing impact and other uncertainties of future acquisition or combinations within relevant industries. As a result, Legal & General Group Plc's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in Legal & General Group Plc's forward-looking statements. 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. ======================================================================================================================== Page 5 Intentionally Blank ======================================================================================================================== Page 6 Business review =============== Financial highlights 2007 2006 ======================================================================================================================== EEV(1) basis: Worldwide life and pensions new business (PVNBP(2)) £9,807m £8,930m Worldwide contribution from new life and pensions business £359m £418m Worldwide life and pensions operating profit £856m £1,030m Worldwide operating profit £912m £1,233m Profit from ordinary activities after tax £1,212m £1,446m Shareholders' equity £8,468m £7,931m Shareholders' equity per share 134.5p 121.4p Diluted earnings per share based on operating profit after tax 9.76p 13.36p ------------------------------------------------------------------------------------------------------------------------ IFRS(3) basis: Worldwide operating profit £658m £1,720m(4) Profit from ordinary activities after tax £718m £1,631m Shareholders' equity £5,446m £5,425m Shareholders' equity per share 86.5p 83.0p Diluted earnings per share based on operating profit after tax 7.13p 21.30p Recommended final dividend per share 4.10p 3.81p Recommended full year dividend per share 5.97p 5.55p ------------------------------------------------------------------------------------------------------------------------ Notes: 1. European Embedded Value 2. Present Value of New Business Premiums 3. International Financial Reporting Standards 4. Restated for revised IFRS operating profit definition RESULTS OVERVIEW ================ The present value of new worldwide life and pensions premiums increased by 10% in 2007 to £9,807m (2006: £8,930m) driven by strong sales of bulk purchase annuities (BPA), with the rapid development of the new pensions buy-out market, individual annuities and pensions. Contribution from new life and pensions business was £359m (2006: £418m). The benefit to our protection margin of the introduction of PS06/14 in 2006 moderated during 2007, as anticipated, and competition and fiscal uncertainty in the bond market affected the contribution from our bond business. Life and pensions experience variances and operating assumption changes were positive £133m, before the impact of a strengthening in longevity assumptions on our UK annuities book of negative £269m (gross of tax). Worldwide EEV operating profit was £912m (2006: £1,233m). Shareholders' equity on an embedded value basis increased by 7% to £8,468m (2006: £7,931m), reflecting the profits generated in the year and the benefits of the Capital review - the major elements of which were completed in 2007. Worldwide IFRS operating profit in 2007 was £658m (2006: £1,720m). UK reserving changes and other adjustments contributed £869m in 2006 against just £51m in 2007. The 2007 operating profit included the impact of strengthened longevity reserving on our annuities book (negative £214m) and the June and July UK flood losses in our General insurance business (negative £76m net of reinsurance). Operating profit from our Investment management business increased by 17% to £155m (2006: £133m), which included additional income earned from the management of internal funds at market referenced rates. There were a number of significant positive changes to our balance sheet structure during 2006 and 2007 as part of our broad ranging Capital review. These were summarised in a presentation to analysts and investors on 10 January 2008. During 2007, actions taken included the conversion of Legal & General Pensions Limited (LGPL) to an Insurance Special Purpose Vehicle and the modernisation of Legal & General Assurance Society Limited's (Society's) long term fund structure. These added a total of £322m to embedded value and £321m to IFRS profit before tax in 2007. We also initiated a £1bn share buyback in July 2007 - details of which can be found in the 'Share buyback' section below. ======================================================================================================================== Page 7 EEV BASIS ========= UK life and pensions operating profit ------------------------------------- £m 2007 2006 ------------------------------------------------------------------------------------------------------------------------ Contribution from new business after cost of capital 321 380 Contribution from in-force business 121 369 Development costs (41) (21) Contribution from shareholder net worth 319 146 ------------------------------------------------------------------------------------------------------------------------ UK life and pensions operating profit 720 874 ======================================================================================================================== UK life and pensions - Contribution from new business after cost of capital ----------------------------------------------------------------------------- PVNBP (£m) Contribution (£m) Margin (%) 2007 2006(1) 2007 2006(1) 2007 2006(1) ------------------------------------------------------------------------------------------------------------------------ Protection 1,161 1,201 108 131 9.3 10.9(2) Annuities(1) 2,045 1,818 187 195 9.1 10.7 ------------------------------------------------------------------------------------------------------------------------ Risk business total 3,206 3,019 295 326 9.2 10.8 ------------------------------------------------------------------------------------------------------------------------ Unit linked bonds 2,512 2,612 21 51 0.8 2.0 Pensions - Stakeholder and other non profit 1,674 1,326 (14) (10) (0.8) (0.7) With-profits savings 1,500 1,149 19 13 1.3 1.1 ------------------------------------------------------------------------------------------------------------------------ Savings business total 5,686 5,087 26 54 0.5 1.1 ------------------------------------------------------------------------------------------------------------------------ Total 8,892 8,106 321 380 3.6 4.7 ======================================================================================================================== (1) For 2007 reporting, with-profits annuity business has been recategorised from 'with-profits' to 'annuities'. 2006 comparatives have been restated. This business amounted to £47m of PVNBP and £2m of new business contribution in 2007 (£83m and £4m respectively in 2006). (2) Includes an uplift of 2.8 percentage points as a result of the implementation of PS06/14 in 2006. - Protection: Despite a slowing housing market in 2007, the present value of new protection premiums was only marginally lower than 2006 at £1,161m (2006: £1,201m). With better than expected mortality experience, positive business mix changes in both individual and group protection and lower in-force expenses, the full year margin of 9.3% was above the H1 07 margin of 9.1% and well above the full year 2006 underlying margin of 8.1%. As stated at our 2006 Preliminary results, the reported 2006 margin of 10.9% was inflated by approximately 2.8 percentage points by the implementation of PS06/14. As anticipated, this led to significant repricing of individual protection policies in 2007 as the margin benefit of the revised regulation was largely passed on to customers. These results were achieved while continuing to invest in our operational capabilities to extend further our competitive advantage. - Our annuity business grew strongly in 2007, with the present value of new annuities business up 12% to £2,045m (2006: £1,818m). This reflected growth in individual annuities and our success in the rapidly emerging new pensions buy-out market. The latter has been dominated, in our experience to date, by the buy-out of pensions in payment. These transactions are of shorter duration and consequently of lower reported margin than traditional schemes but satisfy our return on capital targets. The aggregate annuities new business margin of 9.1% (2006 restated: 10.7%) reflects not just the current profile of this new market but also increased investment in our systems and technical capabilities to ensure we are equipped to deal with high levels of business activity and the evolving requirements of our clients. It also takes fully into account our strengthened longevity assumptions, detailed in the 'Contribution from in-force business' section below. We plan to invest in an improved IT platform in 2008 to reinforce our administrative capacity further. - The unit linked bond margin was 0.8% against a 2006 margin of 2.0%, reflecting the increasingly competitive nature of this market segment, together with a small increase in lapse assumptions and investment in improved processing. In addition, the uncertainty around proposed new Capital Gains Tax rules impacted volumes in the fourth quarter, whilst acquisition expenses remained geared to higher volumes. ======================================================================================================================== Page 8 - Stakeholder and other non profit pensions: We believe the high net worth individual and corporate pensions markets offer significant opportunity for long-term profitable growth. In 2007, we increased investment to expand our product range and infrastructure, launching a non-insured SIPP on the Cofunds platform and developing our web functionality for corporate schemes. Consequently, the new business margin of negative 0.8% was slightly lower than 2006 (negative 0.7%). We continued to build momentum in the corporate pensions segment, focussing on large, high quality schemes and entering the Group SIPP market. In individual pensions, we successfully targeted larger case size, single premium transfer business. We increased our total pensions market share during the year to 6.3% (2006: 5.8%). - The with-profits savings new business margin now reflects the aggregate with-profits bond and pension margins. With-profits annuities have been reclassified within 'annuities'. The with-profits savings margin improved to 1.3% in 2007 (2006 restated: 1.1%). UK life and pensions - Contribution from in-force business ---------------------------------------------------------- £m 2007 2006 ------------------------------------------------------------------------------------------------------------------------ Expected return(1) 262 323 Experience variances and operating assumption changes: - Mortality/longevity/morbidity (155) 5 - Persistency (66) (27) - Expenses (51) (78) - Other 131 146 ------------------------------------------------------------------------------------------------------------------------ Contribution from in-force business 121 369 ======================================================================================================================== (1) Details of the calculation on which expected return is based can be found in Note 3.02 of the financial results. • Mortality/longevity/morbidity: Mortality experience and operating assumption changes, excluding annuitant longevity strengthening, were strongly positive at £114m. Our long term investment in underwriting and claims management in both our individual and group protection businesses contributed to the favourable experience variances and assumption changes of £72m. A review of our expectations relating to the proportion of married annuitants gave rise to a positive assumption change of £42m. Mortality experience on our annuities book in 2007 was a small positive. However, we changed the shape and strengthened our assumptions of future longevity, giving rise to a reduction in operating profit of £269m. As an example, under the revised assumptions, the life expectancy of a new male customer, aged 65, in our Compulsory Purchase Annuity portfolio increased to 25.1 years from 23.8 on a best estimate basis and to 26.2 years from 25.1 on a regulatory reserving basis. Full details of these changes are provided in Note 3.17 in the financial results. • Persistency: Persistency experience and assumption changes totalled negative £66m in 2007 (2006: negative £27m). There was a deterioration in protection lapse experience at shorter durations during 2007, owing to the effect of the temporary introduction of Pensions Term Assurance in 2006 and more active repricing in the market following the introduction of PS06/14. Future lapse assumptions were strengthened for unit linked bonds and with-profits savings. Experience and assumption changes relating to non profit pensions were a small positive. • Expenses: Expense experience and operating assumption changes were negative £51m (2006: negative £78m). Negative experience variances of £19m related mainly to one-off costs, including the implementation of the partnership with Nationwide Building Society. Changes to future expense assumptions gave rise to a negative variance of £32m. We benefited from reduced expense assumptions for our protection business. However, this was more than offset by increased investment and administration expenses across a number of products, including annuities, pensions and with-profits savings. ======================================================================================================================== Page 9 • Other: Other experience and operating assumption changes were positive £131m (2006: £146m). Positive experience variances of £106m mainly related to the impact of introducing market referenced fees for investment management services provided to Society and LGPL by Legal & General Investment Management Limited (LGIM). This led to an increase in the underlying value of the with-profits business under the EEV look through principle. Assumption changes of positive £25m included a change to reserving assumptions for unit linked business following the implementation of PS06/14, and a favourable reappraisal of the endowment review reserve. UK life and pensions - Development costs: ----------------------------------------- Development costs for 2007 of £41m (2006: £21m) related primarily to the establishment of Legal & General International (Ireland) Limited (£17m) and improvements to our pensions administration systems. UK life and pensions - Contribution from shareholder net worth: --------------------------------------------------------------- Following the balance sheet restructuring which took place as part of the Capital review, the definition of shareholder net worth was revised to include Society Shareholder Capital held outside the long term fund (see Note 3.01 in the financial results). This change was reflected in an increased contribution of £319m in 2007 (2006: £146m). The full calculation is detailed in Note 3.02. From 2008, the contribution from shareholder net worth will be calculated as a gross investment return on all Society shareholder capital excluding the contingent loan. For the contingent loan, the contribution will continue to be calculated as the unwind of the discount rate on its opening value (31 December 2007: £614m), grossed up for tax. International life and pensions operating profit ------------------------------------------------ £m 2007 2006 ------------------------------------------------------------------------------------------------------------------------ Contribution from new business after cost of capital 38 38 Contribution from in-force business - Expected return 80 70 - Experience variances 3 19 - Operating assumption changes 2 17 Contribution from shareholder net worth 13 12 ------------------------------------------------------------------------------------------------------------------------ Operating profit 136 156 ======================================================================================================================== Full year 2007 contribution from new business of £38m was in line with 2006 (£38m) but more than double the H1 07 contribution of £13m, owing mainly to the implementation of a Triple X financing arrangement in the second half of the year in the USA. Experience and operating assumption changes of positive £5m in 2007 compared with positive £36m in 2006. Expected return from in-force business increased to £80m (2006: £70m) as a result of the unwind of a higher opening value of in-force at a higher discount rate. Overall operating profit from our international operations was £136m (2006: £156m). ======================================================================================================================== Page 10 Profit attributable to equity holders ------------------------------------- £m 2007 2006 ------------------------------------------------------------------------------------------------------------------------ Operating profit 912 1,233 Variation from longer term investment return 116 460 Effect of economic assumption changes 57 2 Property (expense)/income attributable to minority interests (6) 67 Corporate restructure 161 (216) ------------------------------------------------------------------------------------------------------------------------ Profit from continuing operations before tax attributable to equity holders 1,240 1,546 Tax charge on profit from ordinary activities (327) (422) Effect of UK Budget tax changes 93 - Tax impact of corporate restructure 206 322 ------------------------------------------------------------------------------------------------------------------------ Profit from ordinary activities after tax 1,212 1,446 Loss/(profit) attributable to minority interests 6 (67) ------------------------------------------------------------------------------------------------------------------------ Profit attributable to equity holders 1,218 1,379 ======================================================================================================================== Profit attributable to equity holders was £1,218m in 2007 (2006: £1,379m). The variation from longer term investment return was £116m in 2007 (2006: £460m), reflecting the positive impact of the changed investment strategy for the assets backing the in-force annuity business (see Note 3.17), partially offset by underperformance against long term assumptions in UK equities and property. The corporate restructuring benefit to profit before tax of £161m related principally to the conversion of LGPL to an Insurance Special Purpose Vehicle on 1 November 2007. The tax impact of corporate restructuring reflected the benefit of transferring £1.7bn of Shareholder Retained Capital from the long term fund with no incremental tax. These actions were two of a number taken during 2007 as part of the Capital review. Further details can be found in Note 3.01 to these results. As we reported at our Interim results, the 2007 UK Budget gave rise to a one-off increase in embedded value of £93m, primarily from the reduction in the corporation tax rate from 30% to 28% from April 2008. IFRS BASIS ========== UK life and pensions operating profit ------------------------------------- 2007 2006 £m restated(1) ------------------------------------------------------------------------------------------------------------------------ Non profit business - Expected capital release 406 555(2) - New business strain (344) (546)(3) - Reserving changes and other adjustments 51 869 ------------------------------------------------------------------------------------------------------------------------ Net capital released from non profit business (net of tax) 113 878 ------------------------------------------------------------------------------------------------------------------------ Net capital released from non profit business (gross of tax) 161 1,255 ------------------------------------------------------------------------------------------------------------------------ Investment return 317 213 Other expenses (27) (17) ------------------------------------------------------------------------------------------------------------------------ Non profit business 451 1,451 ------------------------------------------------------------------------------------------------------------------------ With-profits business 106 95 ------------------------------------------------------------------------------------------------------------------------ UK life and pensions operating profit 557 1,546 ======================================================================================================================== (1) Restated for revised IFRS operating profit definition. (2) Reported expected release prior to PS06/14. (3) New business strain prior to PS06/14: £546m; New business strain post PS06/14: £268m. The expected capital release from the in-force business exceeded new business strain by £62m net of tax in 2007. As anticipated, the expected release of £406m was lower than in 2006 (£555m), reflecting the significant acceleration in the release of reserves in 2006 following the implementation of PS06/14. Current management estimates suggest an increase of around 10% in the expected release for 2008. ======================================================================================================================== Page 11 The new business strain of £344m (2006: £268m after PS06/14 adjustment) included the impact of strengthened annuitant longevity assumptions, together with more prudent strain factors applied to the significant levels of new BPA business written towards the end of 2007 which had not been loaded onto the administrative system by year end. In addition, we experienced increased strain on our protection products as a result of continued investment in systems and processes and more intense repricing activity in the market during the year. Reserving changes and other adjustments in 2006 of positive £869m mainly reflected the implementation of PS06/14 (positive £641m) and a change to the investment mix of assets backing our annuity business (positive £422m). By comparison, Reserving changes and other adjustments in 2007 were positive £51m. This included a charge of £214m for the impact of strengthened annuitant longevity reserving assumptions, partially offset by a change in assumptions for the proportions married (positive £64m). The non profit business also benefited from a favourable investment experience variance in the year of £134m, principally relating to the impact of the changed investment strategy for the assets backing the in-force annuity business. There were also reserve releases of £37m from our unit linked bond and pension business following the implementation of PS06/14 (see Note 4.02(b) in the financial results). The investment return increased by 49% to £317m in 2007 (2006: £213m), reflecting an average return of 7% on the average balance of invested assets held within Society Shareholder Capital (SSC) during 2007 (including interest bearing intra group balances) calculated on a quarterly basis. The average balance was significantly higher than during 2006, following the non profit reserve releases at 31 December 2006. The invested assets (including interest bearing intra group balances) held within the SSC amounted to £4.7bn at 31 December 2007 (£4.8bn at 31 December 2006). Other expenses were £27m (2006: £17m), comprising mainly the development of our International bond product. The with-profits transfer reflects one ninth of the cost of policyholder bonuses, which for 2007 totalled £665m, grossed up for corporation tax at 30%. International life and pensions operating profit ------------------------------------------------ £m 2007 2006 ------------------------------------------------------------------------------------------------------------------------ USA 59 58 Netherlands 11 7 France 16 10 ------------------------------------------------------------------------------------------------------------------------ International life and pensions operating profit 86 75 ======================================================================================================================== Operating profit across our international operations increased by 15% in 2007. In the USA, profit was broadly stable at £59m (2006: £58m), reflecting increased sales levels offset by currency fluctuations. In the Netherlands, profits increased to £11m (2006: £7m) despite a challenging savings market. In France, regulatory changes to certain equity savings products led to increased new business growth and an increase in profits to £16m (2006: £10m). Investment management operating profit -------------------------------------- £m 2007 2006 ------------------------------------------------------------------------------------------------------------------------ Investment management new business: - Institutional funds(1) 54,431 26,033 - Core UK retail investments APE 161 123 ------------------------------------------------------------------------------------------------------------------------ Operating profit: - Managed pension funds 103 96 - Private equity - 4 - Property 6 6 - Retail investments 8 11 - Other income 38 16 ------------------------------------------------------------------------------------------------------------------------ Operating profit 155 133 ======================================================================================================================== (1) Including £1,809m of institutional investments in unit trust funds (2006: £5,383m) previously reported within UK Savings. Operating profit from our investment management business increased by 17% to £155m (2006: £133m). Managed pension fund profits increased by 7% in 2007 to £103m (2006: £96m). During 2007, we continued to invest in building our broader product capabilities, particularly in structured solutions and active fixed income. ======================================================================================================================== Page 12 There was a small reduction in profitability in our retail investment business to £8m (2006: £11m), as we increased investment in our distribution and product offering. The increase in other income to £38m (2006: £16m) reflected the change to charging market referenced fees for the provision of investment management services to the UK business. This was in place for LGPL from the beginning of 2007 and for Society from July 2007. It added £23m to investment management operating profit for the year. General insurance operating profit ---------------------------------- 2007 2006 £m Operating Underwriting Operating Underwriting profit/(loss) result profit/(loss) result ------------------------------------------------------------------------------------------------------------------------ Household (86) (101) (9) (21) Other 19 15 18 13 ------------------------------------------------------------------------------------------------------------------------ (67) (86) 9 (8) ======================================================================================================================== The General Insurance operating loss in 2007 of £67m included losses of £76m net of reinsurance from the UK floods in June and July, and £8m for the cost of windstorm Kyrill in January. Following our withdrawal from the motor and healthcare markets in 2006 and early 2007, we have focussed on developing our core household insurance proposition and diversifying distribution. Household premiums grew by 6% in the year, while expenses remained flat. Other operational income ------------------------- £m 2007 2006 restated ------------------------------------------------------------------------------------------------------------------------ Shareholders' other income: - Investment return on shareholders' equity 51 65 - Interest expense (119) (106) ------------------------------------------------------------------------------------------------------------------------ (68) (41) Other operations 1 - Unallocated corporate and development expenses (6) (2) ------------------------------------------------------------------------------------------------------------------------ Other operational income (73) (43) ======================================================================================================================== Investment return on shareholders' equity in 2007 reflected an average return of 5% on the average balance of invested assets (including interest bearing intra group balances) held outside Society Shareholder Capital during 2007 calculated on a quarterly basis. As at 31 December 2007, these assets amounted to £1.1bn (31 December 2006: £1.1bn). However, we expect this to reduce as we continue the £1bn share buyback programme announced and initiated in July 2007. Interest expense reflects the cost of the average level of group debt outstanding in 2007, excluding non recourse financing. Group debt (excluding non recourse financing) amounted to £2.2bn at 31 December 2007 (31 December 2006: £1.8bn), reflecting the issue of £600m Innovative Tier 1 capital and the repayment of commercial paper in the year. Profit attributable to equity holders ------------------------------------- £m 2007 2006 restated ------------------------------------------------------------------------------------------------------------------------ Operating profit 658 1,720 Variation from longer term investment return (90) 231 Property (expense)/income attributable to minority interests (6) 67 Release of 1996 Sub-fund 321 - ------------------------------------------------------------------------------------------------------------------------ Profit from continuing operations before tax attributable to equity holders 883 2,018 Tax attributable to equity holders (165) (387) ------------------------------------------------------------------------------------------------------------------------ Profit from ordinary activities after tax 718 1,631 Loss/(profit) attributable to minority interests 6 (67) ------------------------------------------------------------------------------------------------------------------------ Profit attributable to equity holders 724 1,564 ======================================================================================================================== ======================================================================================================================== Page 13 The merger of the 1996 Sub-fund with shareholder retained capital in 2007 - one of the actions of the broader Capital review - gave rise to a one-off increase in profit before tax of £321m, as the 1996 Sub-fund was transferred from unallocated divisible surplus to shareholders' equity. SHARE BUYBACK ============= In July 2007, Legal & General initiated a £1bn share buyback programme. In 2007, 241.2m shares were repurchased at a cost of £320m (after stamp duty), giving an average price per share of 131.9p (before stamp duty). This compared with the volume weighted average price over that same period of 133.7p. All shares repurchased have been cancelled. In the first two months of 2008, a further 156.2m shares were repurchased at an average price per share of 126.7p (before stamp duty). It is expected that the buyback programme will be completed by the end of the third quarter of 2008. INVESTMENT PORTFOLIO ==================== Legal & General has no material exposure to credit-impaired securities. £bn 31 December 2007 ------------------------------------------------------------------------------------------------------------------------ Worldwide funds under management 312 Client and policyholder assets (264) With-profits fund assets (21) ------------------------------------------------------------------------------------------------------------------------ Assets to which shareholders are directly exposed 27 ------------------------------------------------------------------------------------------------------------------------ Comprising: Assets held to back the UK non-linked non profit business 17 Society Shareholder Capital assets 4 Assets of other operations 6 ------------------------------------------------------------------------------------------------------------------------ 27 ------------------------------------------------------------------------------------------------------------------------ Split by asset class: Equities 2.9 Property 0.6 Bonds 22.5 Cash and cash equivalents 1.0 ------------------------------------------------------------------------------------------------------------------------ 27.0 ------------------------------------------------------------------------------------------------------------------------ Split of bonds by credit rating: AAA 8.9 AA 3.2 A 6.8 BBB 2.8 BB or below 0.2 Not rated 0.6 ------------------------------------------------------------------------------------------------------------------------ 22.5 ======================================================================================================================== Legal & General manages over £312bn of assets worldwide of which £264bn are managed for the exclusive benefit of clients and policyholders and for which shareholders bear no direct market risk. £21bn of assets are held within the with-profits part of the fund in the UK. Although there is a risk that shareholders would have to provide capital support in extreme scenarios, this fund is managed with the aim of being self-financing. The shareholders' direct exposure to asset markets comprises: • Assets held to back Legal & General's UK non-linked non profit business of £17bn; • Society Shareholder Capital assets of £4bn, which are invested predominantly in equities (69% equities; 12% property; 19% bonds and cash); and • Assets of other operations of £6bn, including Legal & General Insurance Limited, LGIM and our overseas businesses. ======================================================================================================================== Page 14 In respect of the £22.5bn held in bonds to which shareholders are exposed, more than 96% is investment grade. At 31 December 2007, total asset-backed security (ABS) bond holdings within these portfolios amounted to £4.5bn, with an AA average credit rating. Within this, we held: • Sub-prime and Alt A mortgage backed holdings of £65m, including £7m exposure to structured investment vehicles. There were no other sub-investment grade ABS holdings. • Commercial Mortgage Backed Securities of £811m with an average credit rating of AA+. • Residential Mortgage Backed Securities of £509m with an average credit rating of AAA. • Total CDO holdings of £797m, with an average credit rating of AAA on the Moody's methodology. The holdings are internally managed, with a reference portfolio of investment grade US and European corporate bonds. Shareholder exposure to non-investment grade monoline wrapped credit was very limited, representing approximately 0.4% of the total bond portfolio assets of £22.5bn to which shareholders are exposed. Legal & General made greater use of derivative instruments in 2007, which diversified sources of investment return and reduced reliance on UK corporate bonds. The approach enables more active management of the annuity portfolio assets and offers the potential for higher returns by accessing the shorter end of the credit market in the UK and overseas. The average duration of new fixed income securities purchased in 2007, as backing assets for new business annuity liabilities, was approximately 3 years less than existing holdings. CAPITAL REVIEW ============== Legal & General completed the major components of a broad ranging Capital review in 2007. A summary of the review and the principal actions taken was presented to analysts and investors on 10 January 2008. The presentation also provided estimated proforma financial impacts of the changes made in 2007 on the 2007 Preliminary results, based on year end 2006 figures. The actual impacts were broadly in line with the estimates given. 1) The conversion of LGPL to an Insurance Special Purpose Vehicle gave rise to an increase in embedded value of £112m. As anticipated, there was no impact on IFRS results. 2) The restructuring of the long term fund gave rise to an increase in embedded value of £210m. IFRS profit before tax increased by £321m. Further details can be found in Notes 3.01, 4.01 and 5.01. CAPITAL BALANCED SCORECARD MEASURES =================================== At our Capital and Cash Flow presentation in November 2006, we indicated our intention to update the market regularly on our balanced scorecard measures for capital management. These are detailed in the following table: Range 31 December 31 December 2007 2006 ------------------------------------------------------------------------------------------------------------------------ IGD Surplus capital £3bn-£4bn £4.1bn(1) £2.0bn Society Surplus capital £2.5bn-£3.5bn £4.4bn(1) £4.9bn Economic Capital Strong AA Very strong AA Very strong AA Return on Embedded Value Increase over 8.0% 12.5% medium term ======================================================================================================================== (1) Based on draft unaudited regulatory returns. The IGD Surplus capital range has been updated to reflect the revised balance sheet structure put in place at 31 December 2007 (Range at 31 December 2006: £1bn-£2bn). ======================================================================================================================== Page 15 Intentionally Blank This information is provided by RNS The company news service from the London Stock Exchange

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