L&G 2010 Final Results

RNS Number : 1048D

Legal & General Group Plc

17 March 2011

 



LEGAL & GENERAL GROUP PLC PRELIMINARY RESULTS 2010

STOCK EXCHANGE RELEASE

17 MARCH 2011

Legal & General delivers growth across the business, IFRS operating profit of £1,002m, cash generation of £728m and increases final dividend by 25%

·      WORLDWIDE SALES UP 28% TO £1.8BN APE (2009: £1.4BN APE),
NET ASSET FLOWS £9.7BN (2009: £10.5BN)

·      IFRS OPERATING PROFIT £1,002M (2009: £1,109M),
IFRS PRE TAX PROFIT £1,092M (2009: £1,074M)

·      OPERATIONAL CASH GENERATION UP 11% to £808m (2009: £726M)
NET CASH GENERATION £728M (2010 TARGET: £600M, 2009: £699M)
PLAN TO GENERATE £700M NET CASH

·      EARNINGS PER SHARE 14.07P (2009: 14.82P)

·      FULL YEAR DIVIDEND UP 24% TO 4.75P PER SHARE (2009: 3.84P PER SHARE)

·      EEV PROFIT BEFORE TAX UP 204% TO £1,677M (2009: £522M)
EEV PER SHARE UP 16% TO 132P (31/12/2009: 114P)

·      IGD SURPLUS UP TO £3.7BN (31/12/2009: £3.1BN)

·      IFRS RETURN ON EQUITY 18.2% (2009: 22.2%)

Tim Breedon, Group Chief Executive, said:

"In 2010 we successfully demonstrated we can both grow the business and deliver improved net cash generation. Today's results evidence the value created by our improved business model.  We are building a strong track record in delivering cash which, coupled with the high visibility of future cash flows, has given the Board the confidence to recommend a further 25% increase in the final dividend to 3.42p per share.

"We are confident about the growth prospects for Legal & General.  Customer demand is rising in the UK, and we have the right business model and product mix for the current economic and demographic environment.  There is consolidation in many of our markets, and this further underpins our confidence that Legal & General will be a growing force as the welfare state retrenches and individuals increasingly look to high-quality, good value risk, savings and investment provision.  We expect to generate £700m of net cash in 2011.

"Our balance sheet is strong, each of our business divisions is profitable and cash-generative, and we are delivering excellent results across the Group." 

RETURNS - DIVIDEND INCREASED BY 24%, COVERED 3.0 TIMES BY EARNINGS

	2010	2009
Return on equity (%)	18.2	22.2
Number of shares (m)	5,867	5,862
Net cash generation per share (pence)	12.41	11.92
Earnings per share (pence)	14.07	14.82
Full year dividend per share (pence)	4.75	3.84
Cash dividend cover (x)	2.6	3.1
Earnings dividend cover	3.0	3.9

KEY PERFORMANCES INDICATORS

OPERATIONAL CAH GENERATION¹ UP 11% TO £808M,
NET CASH GENERATION UP 4% TO £728M

2010 £m	Risk	Savings	Inv Mgmt	International	Group & capital financing	Group projects	2010
Operational cash generation	439	138	162	44	25	-	808
New business strain	(10)	(70)	-	-	-	-	(80)
Net cash generation	429	68	162	44	25	-	728
IFRS Operating profit	560	115	206	102	58	(39)	1,002

2009 £m	Risk	Savings	Inv Mgmt	International	Group & capital financing	Group projects	2009
Operational cash generation	454	106	125	8	33	-	726
New business strain	50	(77)	-	-	-	-	(27)
Net cash generation	504	29	125	8	33	-	699
IFRS Operating profit	735	50	172	127	57	(32)	1,109

ASSETS - £354bn in LGIM, £64bn on Savings, £25bn in Annuities

£bn	2010	2009
LGIM2	354	315
Savings	64	55
Annuities	25	23

EEV Results - Embedded Value per Share up 16% to 132p

	2010	2009
Worldwide PVNBP	7,876	7,280
Worldwide new business margin (%)	4.8	4.5
EEV Operating profit	1,224	1,319
EEV Profit before tax	1,677	552
Number of shares (m)	5,867	5,862
Shareholders' equity	7,730	6.695
Equity per share (pence)	132	114

1.     Net cash generation is defined as operational cash generation less new business strain for the UK non profit Risk and Savings businesses.  Operational cash generation is defined as the expected release from in-force business for the UK non profit Risk and Savings businesses, the shareholders' share of bonuses on with-profits business, the post-tax IFRS operating profit on other UK businesses, including an expected investment return (excluding expected gains/losses on equities) on Group capital and financing invested assets, and dividends remitted from our international businesses from sustainable cash generation.

2.     Included Annuities and some Savings assets.

GROUP RESULTS

£m	2010	2009
Operational cash generation	808	726
New business strain	(80)	(27)
Net cash generation	728	699
IFRS
Risk	560	735
Savings	115	50
Investment Management	206	172
International	102	127
Group capital and financing	58	57
Group projects	(39)	(32)
Operating profit	1,002	1,109
Variation from longer term investment return	90	(16)
Property losses attributable to non-controlling interests	-	(19)
Profit before income tax attributable to equity holders	1,092	1,074

OPERATIONAL CASH GENERATION UP 11%
In 2010, the Group delivered an 11% increase in operational cash generation to £808m (2009: £726m).  Headline net cash generation was up 4% to £728m (2009: £699m) despite the reduction in positive annuity strain from £129m to £60m in 2010. 

IFRS PROFIT BEFORE TAX UP 2% TO £1,092M (2009: £1,047M)
IFRS operating profit in Risk was down to £560m due to a reduction in the positive new business strain in annuities, losses in the General insurance business due to the extreme cold weather in December, and a net increase in reserves of £59m in respect of annuitant mortality (2009: £85m release).  Annuity new business grew 11% as a result of a record year in individual annuities and continued strong demand for small bulk annuity schemes.  Housing and protection gross premiums grew 6% as new business volumes were maintained despite weaker markets.

The transformation in Savings continued.  Operating profit of £115m was up 130% (2009: £50m) and net cash generation was up 134% to £68m (2009: £29m).  This shift in performance has been achieved whilst accelerating growth in new business APE up 38% to £1,253m (2009: £907m), net new funds up 80% to £3.1bn (2009: £1.7bn) and assets under administration up 16% to £64bn (2009: £55bn).

LGIM delivered record profits of £206m (2009: £172m).  UK and, increasingly, international clients continue to be attracted to LGIM's range of passive and actively managed funds.  Funds under management grew 12% to £354bn (2009: £315bn) and margins improved as active fund flows increased.  Net cash generation from LGIM improved by 30% to £162m (2009: £125m). 

The commencement of ordinary dividends from the US business (£33m, 2009: nil) contributed to a 450% increase in cash from the International business.  International generated £102m of operating profit (2009: £127m) and £146m of new business APE (2009: £115m).  We also completed the first phase of our US capital management programme which contributed £28m to IFRS profit before tax in 2010 (2009: £18m).

Below operating profit, positive investment variances of £90m (2009: negative £16m) led to profit before tax of £1,092m (2009: £1,074m).  After allowing for the payment of £238m of dividends in the year, shareholders' equity increased by 15% to £4.8bn (2009: £4.2bn) equating to 82.3p per share (2009: 71.6p per share).

FINAL DIVIDEND INCREASED BY 25% TO 3.42 PENCE PER SHARE

Continued strong operational cash and net cash generation, coupled with the Board's confidence in the prospects for further growth in cash generation underpins the decision to recommend an 25% increase in the final dividend to 3.42p (2009: 2.73p) per share at a cost of £201m (2009: £160m).

As economic and regulatory uncertainties recede, the Board intends to reduce net cash generation coverage of the dividend towards two times over the medium term.

STRATEGY AND OUTLOOK

We aim to grow our market leading Risk, Savings and Investment Management franchises whilst realising the multiple levels of synergy which exist between our businesses.  We have successfully focused on the key performance metrics of IFRS profit, operational cash and net cash generation.  These metrics are fully embedded from external reporting through to management objectives and reward.  We continue to manage the business to achieve above hurdle returns on economic capital.

During 2010, we continued to execute our strategy successfully.  In Risk, we broadened our distribution franchise in annuities, increased our market share of intermediated mortgage distribution, and won or extended bank and building society distribution deals in protection, including Sainsbury's Bank.  This, coupled with our expertise in pricing and underwriting, has enabled further growth in the scale and profitability of this business.

We continue to drive forward the transformation in Savings, building a profitable, modern, fund based business with a lower structural cost base.  We will continue to grow scale in assets under administration and drive operational leverage.

With a cost base of just 5.5bps of assets, LGIM is a high-scale, low-cost manufacturer of investment management solutions.  LGIM sits at the core of the Group.  Its strategy is to build on its leading position as a manager of assets for UK pension funds, and to export its low cost, high service, low investment risk model into other markets, with successes already seen in the US, the Middle East and mainland Europe.

In International, we have delivered more cash through increased dividends and reduced capital employed through the execution of the first phase of our US capital management programme.  Our joint venture in India is progressing well.

Our strategy has delivered business growth and strong sustainable net cash generation, enabling us to fund a growing dividend.  We see good growth opportunities for the Group in 2011 and beyond.  In the UK, a combination of state retrenchment, an ageing population, increased household savings and continued de-risking activity by pension trustees will drive growth across protection, annuities, savings and LGIM.  Overseas, we see opportunities to take our bancassurance based, low cost savings model into other emerging markets. 

BUSINESS REVIEW - RISK

Financial Highlights  £m	2010	2009
Operational cash generation	439	454
New business strain	(10)	50
Net cash generation	429	504
Assumption changes, experience and other variances	131	231
IFRS Operating profit	560	735
Investment variances	102	(218)
IFRS profit before income tax attributable to equity holders	662	517

In 2010, the Risk division generated £439m of operational cash (2009: £454m).  Net cash generation was £429m (2009: £504m) as positive new business strain arising from exceptional pricing conditions in annuities began to normalise.  Operating profit was £560m (2009: £735m) reflecting this reduced positive new business strain in annuities and reduced, but still positive, experience variances and assumption changes in 2010.  Annuitant mortality reserves were increased by £59m (2009: £85m release) to update for current year experience and to bring mortality assumptions in line with latest CMIB methodology.  IFRS profit before tax was up 28% to £662m with a contribution from positive investment variances of £102m in 2010.  

The Risk division operates in a number of markets: the provision of income in retirement to individual savers and members of company pension schemes (annuities); and the provision of insurance services to individuals and businesses seeking to mitigate the financial consequences of personal or employee risk (housing & protection).

ANNUITIES

Financial Highlights  £m	2010	2009
Operational cash generation	229	235
New business strain	60	129
Net cash generation	289	364
Individual annuity new business APE	117	98
Bulk annuity new business APE	90	88
Total annuity new business APE	207	186
Non profit annuity assets under administration (£bn)	25.4	22.5
No profit annuity earned interest margin (bps)	117	124
Annuities EEV margin (%)	11.9	11.7

Operational cash generation was £229m (2009: £235m) with an earned interest margin of 117bps.  Net cash generation of £289m includes the benefit of the attractive pricing conditions we have seen for the last two years with business being priced above prudent reserves and generating positive new business strain of £60m (2009: £129m).  This represents 2.9% of new business premiums (2009: 6.9%). 

For the first year ever, we wrote in excess of £1bn of individual annuity business.  New business sales were boosted by sales from our new distribution partnerships with Zurich and SAGA, strong growth in the direct market, the one off impact of the increase in minimum retirement age from 50 to 55, and growth in enhanced annuity sales where our sophisticated pricing model enabled us to grow market share.  Average annuity consideration of £26,000 continues to be low (2009: £24,000) and means we are unlikely to be materially affected by the changes to compulsory annuitisation announced in 2010.

In the bulk annuity market we continued to focus on small schemes, writing 115 schemes during the year (2009: 82 schemes) worth £900m of premium at an average scheme size of £7.8m (2009: £10.8m).  We continue to be highly selective in the large bulk annuity market writing only one scheme in excess of £100m premiums.  We are actively pursuing opportunities within the longevity insurance market, although the emergence of this market continues to be slow. 

OUTLOOK

In the individual annuity market, we believe that continued increase in the number of defined contribution pension savers reaching retirement could lead to around 10% per annum market growth over the next five years.  We anticipate continued rapid growth of enhanced annuities into 2011.  The end of compulsion and the prospect of lower investment yields for a few years will give further impetus to the growth of flexible retirement solutions for those with sizeable accumulated pension savings. For those with smaller pension savings, these more complex products are unlikely to be attractive and a traditional annuity is likely to remain the default choice.

It is anticipated that growth of newer types of bulk annuity deals (Buy In and Longevity Insurance) will continue. By 2012 it is probable that, while a Buy Out deal remains the ultimate goal of most trustees, they will work their way towards this via the stepping stones which other models provide.  There is significant latent demand amongst pension trustees for these types of transactions, which could, in our view, lead to market growth of in excess of 15% per annum over the next five years.  However the pricing outlook for bulk annuities is likely to remain fairly uncertain until the impact of Solvency II is better defined.

HOUSING & PROTECTION

Financial Highlights  £m	2010	2009
Operational cash generation	210	219
New business strain	(70)	(79)
Net cash generation	140	140
Protection new business APE	175	180
Protection new business EEV margin (%)	6.4	7.9
Protection gross premiums	1,179	1,109
General insurance gross premiums	281	273
Total gross premiums	1,460	1,382
General insurance new business premiums	80	57
General insurance combined operating ratio (%)	106	96

Operational cash generation of £210m was negatively impacted by £19m due to a loss in the General insurance business of £6m (2009: £13m profit) as a result of in excess of £30m of claims from severe winter weather in December 2010.  Protection operational cash generation was up 6% to £216m (2009: £203m).  New business strain fell to £70m (2009: £79m) representing 40% of new business APE (2009: 44%).  The business continues to grow with a 6% increase in gross premiums to £1,460m (2009: £1,382m).

In individual protection, gross premiums grew 9% to £890m (2009: £818m) as a result of new business sales of £118m (2009: £123m) and the completion of the transfer of the Nationwide Life back book.  Legal & General wrote over 16% of the individual protection market in 2010.  Progress continues in our strategy of diversification into more specialist higher margin areas of the market with 30% growth in business protection, 9% growth in high net worth protection and 47% growth in direct business.  Despite a weak housing market, we have grown our housing related business with a 15% share of the intermediated mortgage market (2009: 12%) leading to stable volumes of housing related protection and General insurance sales.  New business margins fell to 6.4% (2009: 7.9%) as a result of competitive pricing in the IFA channel, partially offset by cost reduction and improved reinsurance terms.

In group protection, we maintained sales at £57m APE (2009: £57m) despite a 19% fall in the market size in 2010.  This was a result of a combination of securing new business and new product development including a multinational pooling offering, which allows multinational customers to insure a global workforce with a pool of international insurers, and the IHLI (Ill Health Liability Insurance) product, which allows UK Councils to manage their exposure to workers' early retirement pensions when diagnosed with long-term illness. 

In General insurance, extreme weather conditions in December led to an increased number of claims reversing the half year operating profit of £14m, and leading to an £8m full year loss.  Our focus has been on helping affected customers through this difficult time with claims being processed quickly and efficiently.  Beyond the exceptional 2010 weather experience we are pleased with the underlying underwriting performance of the business and have made progress on cost reduction, with expense ratios down to 42% (2009: 43%).  This, in conjunction with product developments and new distribution deals delivered in the year, should benefit 2011 results.

OUTLOOK

The CML (Council of Mortgage Lenders) has forecast that gross mortgage lending will be flat in 2011 (around £136bn) as a result of continued lender restrictions on supply.  We expect that this, coupled with low growth in the UK economy, will mean that growth in the protection market is likely to be in the range of 0-5% over the next few years.  However, we saw a number of competitors leave the protection market in 2010 and we expect this trend to continue into 2011.  A consolidating market presents opportunities for those remaining to increase market share; we expect to be beneficiaries of this trend. 

The market continues to evolve.  Regulatory and legislative change will create opportunities in the housing and protection market with the potential for shifts in distribution and competition. In particular, the ECJ ruling with respect to gender discrimination will affect underwriting and pricing in individual protection.  We are responding through maintaining a tight control on costs, focusing on customer retention, and developing a sales and marketing strategy designed to meet the post RDR distribution landscape.  This includes increasing our direct business (which grew to 6% of individual protection volumes in 2010) and seeking new distribution partnerships with banks and direct affinity partners.

BUSINESS REVIEW - SAVINGS

Financial Highlights  £m	2010	2009
Operational cash generation	138	106
New business strain	(70)	(77)
Net cash generation	68	29
Assumption changes, experience and other variances	47	21
IFRS Operating profit	115	50
Investment variance	(54)	127
IFRS profit before income tax attributable to equity holders	61	177
Savings new business APE	1,253	907
Assets under administration (£bn)	64	55
Net new funds (£bn)	3.1	1.7
New business strain % PVNBP1	2.8	4.2
In force costs to funds (bps)	24	29

1.  UK insured savings business.

The continued success of the Savings strategy, focusing on asset accumulation, selling capital light products and improving operational efficiency, resulted in a 134% increase in net cash generation to £68m (2009: £29m), an increase of 130% to £115m in IFRS operating profit (2009: £50m) and growth of 16% in assets under administration to £64bn (2009: £55bn).  Negative investment variances of £54m (2009: positive £127m) were due to timing differences relating to changes in asset and liability unit linked deferred tax balances.  IFRS profit before tax attributable to equity holders was £61m (2009: £177m). 

OUTLOOK

The transformation of the Savings business positions us well for the changes to the Savings landscape anticipated to take place over the next few years. An increased awareness of the need to save, together with the Retail Distribution Review (RDR) and pension scheme auto-enrolment, will provide opportunities for further growth. Our strategy is to focus on good value propositions, fee based distribution and diversified distribution channels. These are areas where we have seen growth in new business, net fund flows and profitability in 2010, and should position us well ahead of RDR.  New distribution arrangements including an extended agreement with Nationwide Building Society, will further enhance this position. 

Platforms are set to benefit from the changes RDR will bring.  Our products are already offered on the Cofunds platform which has over £30bn of assets under administration and of which we own a 25% shareholding.  In addition, we are actively engaging with other platforms that target our preferred market sector.  Our own platform, Investor Portfolio Service (IPS), is growing in scale amongst our tied distribution and banking partners, and is aligned to our strategy of continuing to increase customer numbers and build asset growth by deepening relationships with existing customers.  Our WorkSave platform will continue to benefit from the emerging trend towards holistic workplace savings propositions.

Auto-enrolment will start to be implemented in 2012 and is likely to expand the workplace pensions market.  We are well prepared to take advantage of these opportunities and are already seeing increased tender activity. Further opportunities to increase membership to existing schemes are anticipated. 

Increased savings ratios and a low interest rate environment should increase inflows into our markets over the medium term, expected to be circa 5-10% growth per annum.  Our increasing customer base, focus on asset retention, improving operational efficiency, greater customer engagement and the investments we are making to exploit market opportunities will enable our Savings business to continue to make a strong cash contribution to Group results.

SAVINGS INVESTMENTS

Savings Investments comprises unit trusts and ISAs, structured products, our platform business and SIPPs (including Suffolk Life).  In total, these businesses achieved net cash generation of £21m (2009: £5m) and IFRS operating profit of £21m (2009: loss of £3m).

This increase has largely been achieved by growing assets under administration by 38% to £23.3bn (2009: £16.9bn) through a combination of strong net fund flows and market movements.  In addition we have improved operational efficiency as the scale of the business has increased.

New business APE grew by 46% in 2010 to £643m (2009: £441m) reflecting growth in all areas.  Unit Trusts and ISAs grew by 32% to £263m (2009: £199m) with an increase in customers attracted to our funds proposition and performance.  Structured products benefited from increased partner diversification increasing new business APE by 85% to £183m (2009: £99m).  Sales on our platform, IPS contributed 10% of the total Savings APE.

Net new business flows of £4.1bn represent an increase of 62% on 2009 and benefits from strong gross new business and improved fund retention year on year.  In particular, new and extended distribution deals have seen a 35% increase in customer numbers for IPS to 130,000.

Asset movements £bn	Mutual funds	Structured, SIPPs & Other	Platform business	Total
Assets under administration (at 1 January 2010)	9.8	5.7	1.4	16.9
Gross new business	2.7	2.5	1.2	6.4
Redemptions	(1.7)	(0.4)	(0.2)	(2.3)
Net new business	1.0	2.1	1.0	4.1
Market movements	1.7	0.4	0.2	2.3
Assets under administration (at 31 December 2010)	12.5	8.2	2.6	23.3

OUTLOOK

The unit trust market has seen impressive growth which we expect to continue.  Our broad product offering, strong brand and diversified distribution model mean we are well positioned in the market to take advantage of future expected growth.

Assets in our platform business increased by 86% in 2010 to £2.6bn (2009: £1.4bn).  Our platform proposition forms a central part of our RDR strategy.  Growth in this business is expected to continue, driven by our banking and tied distribution partners.

The market for structured products continues to benefit from the low interest rate environment where investors seek the potential for higher returns but with a limited exposure to losses. We have a proven manufacturing capability and we anticipate that there will be further opportunities in the market.

INSURED SAVINGS

The Insured Savings business includes workplace pensions, individual pensions, insured bonds and international bonds.  The business has moved from consuming cash in 2009 to generating £1m of net cash in 2010 (2009: negative £22m).  IFRS operating profit has increased by £42m to £31m in 2010 (2009: negative £11m). 

The turnaround strategy of our Insured Savings business has seen continued focus on cost management, asset growth and a shift towards fee based products such as workplace pensions.  Operational cash generation was up 29% to £71m (2009: £55m).  New business strain has reduced by 9% to £70m (2009: £77m) despite new business APE increasing 74% to £478m.  New business strain as a percentage of PVNBP has improved to 2.8% (2009: 4.2%) reflecting the effect of cost management actions, a further shift to capital light products, and increased volumes.

Non profit pensions new business APE increased 81% to £374m (2009: £207m) primarily due to the success of our workplace pensions business where major scheme wins have increased customers by 16% to 335,000 (2009: 290,000).  We have continued the development of our holistic Workplace Savings platform and launched the Workplace Corporate ISA proposition.  At the end of 2010, workplace pension assets increased to £3.2bn (2009: £2.4bn).

Insured bonds new business APE grew by 53% to £104m (2009: £68m) driven by success in international bonds particularly in our banking channels. Onshore bonds sales stabilised, having previously declined following tax changes in 2007 which led to reduced customer appetite. 

Non profit pensions margin increased to 0.1% (2009: negative 0.6%) and non profit bonds to 1.4% (2009: negative 0.6%) benefiting from lower unit costs and a further shift in mix to capital light products.

Asset movements £bn	Total
Assets under administration (at 1 January 2010)	16.5
Gross new business	2.4
Redemptions	(2.0)
Net new business	0.5
Market movements	1.7
Assets under administration (at 31 December 2010)	18.7

OUTLOOK

The outlook for Insured Savings is good with imminent regulatory changes providing opportunities for growth for companies with good cost management, high quality product design and broad distribution reach.

In workplace pensions, the shift from defined benefit to defined contribution and the arrival of auto-enrolment in 2012 will require employers to provide qualifying workplace schemes to their employees.  A strong pipeline of business is already established for new schemes and for existing schemes membership is likely to increase.  Our existing 3,300 corporate defined contribution schemes which currently cover 335,000 lives provide us with an opportunity to take advantage of upcoming market growth given the number of employees who will be looking to access pension provisions.

Our distribution in the workplace pensions market is through fee-based employee benefit consultants.  This channel represents approximately two-thirds of the total market, the remainder being commission based IFAs.  With the advent of consultancy charges and the removal of commission through RDR, the fee-based market is expected to grow.  Scale in assets under administration will drive down unit costs and drive further growth in profitability.

Changes to the tax regime and improving investor confidence will boost the insured bonds market in 2011.

WITH-PROFITS SAVINGS

With-profits Savings comprise all products sold in the with-profits fund; this includes with-profits pensions and with-profits bonds.

IFRS operating profit, representing the shareholders' share of the with-profits bonus, was broadly flat in 2010 at £63m (2009: £64m) with net cash generation of £46m (2009: £46m). New business APE has fallen by 31% from £191m in 2009 to £132m in 2010 reflecting our focus on capital light non profit pensions business.

Asset movements £bn	Total
Assets under administration (at 1 January 2010)	21.4
Gross new business	1.1
Redemptions	(2.6)
Net new business	(1.5)
Market movements	2.2
Assets under administration (at 31 December 2010)	22.1

OUTLOOK

Growth in with-profits business remains challenging in the current environment as customers seek more modern, transparent savings products.  Our strategy of investing in capital light non profit products has reduced the reliance placed on the with-profits business to generate cash and profits.  However, we will continue to generate a cash return from our existing £22bn of assets under administration.

BUSINESS REVIEW - INVESTMENT MANAGEMENT

Financial highlights £m	2010	2009
IFRS Operating profit	206	172
Total revenue	378	316
Total costs	(172)	(144)
Net cash generation	162	125
Average ad valorem fee margin (bps)	10.7	9.8
Average expense margin (bps)	5.5	5.2
Gross new fund management mandates (£bn)	33.1	31.5
Net new fund management mandates (£bn)	6.6	8.8
Closing funds under management (£bn)	354	315

LGIM delivered record IFRS operating profits in 2010 which increased by 20% to £206m (2009: £172m).  This has been achieved by increasing funds under management by 12% to £354bn, strong net fund flows of £6.6bn, a higher fee to fund ratio and continued focus on cost control.  Net cash generation of £162m (2009: £125m) increased by 30% and benefits from the increase in IFRS profit coupled with a lower effective tax rate.

The success of the LGIM business model is centred on low cost manufacturing and excellence in customer service leading to client retention and asset accumulation.  We are exporting these attributes to other product lines and geographies to build on our existing base of 3,190 UK pension fund clients. 

Gross new business of £33.1bn was up 5% on 2009 (£31.5bn).  Our strategy to diversify into international markets to generate growth has seen new mandates won in the USA, Middle East and Europe.  International gross new business of £6.1bn represents 18% of the total new fund flows compared with £2.3bn representing 7% in 2009.  Gross inflows into higher revenue actively-managed funds also increased to £9.4bn (2009: £7.5bn) representing 29% (2009: 24%) of the total inflows.  Strong performance coupled with top quartile customer service resulted in good persistency and net inflows of £6.6bn.  In 2010, outflows were higher than usual as three large clients changed their investment strategy and moved a proportion of their funds to outside the Group.  Overall outflow rates are in-line with our long-term expectations, as benefit payments increase and DB schemes change investment strategy and accelerate their de-risking plans.

Strong new business flows and higher market levels helped funds under management grow 12% to £354bn (2009: £315bn) with an increase in funds across all asset classes.  The strongest growth was seen in our LDI (Liability Driven Investment) offering with a 36% increase in funds to £40.8bn (2009: £29.9bn) and higher margin active funds which now represent 35% (2009: 34%) of the total funds under management.  Our expansion into international markets is gaining pace with £14.6bn of funds under management for international clients (2009: £8.9bn).

Asset movements £bn	Index	Active	Total
Funds under management (at 1 January 2010)	208.3	106.8	315.1
Gross inflows	23.7	9.4	33.1
Gross outflows	(20.8)	(5.7)	(26.5)
Net flows	2.9	3.7	6.6
Market and other movements	17.3	14.5	31.8
Funds under management (at 31 December 2010)	228.5	125.0	353.5

The increased proportion of active funds and greater demand for international index equity holdings has increased the fee margin from 9.8bps in 2009 to 10.7bps in 2010.  This coupled with continued cost management led to IFRS operating profit of £206m in 2010.

INDEX FUNDS

The performance of the index business is predicated on market leading index tracking performance, excellent customer service and an exceptionally low cost base.  This has resulted in sustained, strong new business flows, high persistency and good quality earnings.

Net inflows of £2.9bn helped to drive an increase in index funds under management of 10% in 2010 to £228.5bn (2009: £208.3bn).

Asset movements £bn	UK equities	Int'l equities	Fixed Interest	Total - Index
Funds under management (at 1 Jan 2010)	68.9	73.9	65.5	208.3
Gross inflows	6.1	9.6	8.0	23.7
Gross outflows	(6.2)	(7.8)	(6.8)	(20.8)
Net flows	(0.1)	1.8	1.2	2.9
Market and other movements	3.2	10.3	3.8	17.3
Funds under management (at 31 Dec 2010)	72.0	86.0	70.5	228.5

LDI AND ACTIVE FUNDS

Corporate appetite to de-risk pension fund exposure and apply an investment strategy to match asset and liability cash flows has continued resulting in growth in LDI funds under management of 36% to £40.8bn (2009: £29.9bn).  This underpins the growth of 17% in active funds under management to £125.0bn (2009: £106.8bn).  Fund performance in fixed income was strong with 78% and 91% of funds outperforming their respective benchmarks over 1 and 3 years, respectively, to the end of 2010. 

Legal & General Property (LGIM's commercial property business) continues to perform well and has increased funds under management to become the UK's third largest institutional property investor by assets under management.  In addition it has attracted £1bn of new funds in 2010.

Asset movements £bn	Equities	Fixed Interest	Property & other	LDI	Total - active
Funds under management (at 1 January 2010)	8.8	61.2	6.9	29.9	106.8
Gross inflows	0.2	3.8	0.5	4.9	9.4
Gross outflows	-	(4.4)	(0.1)	(1.2)	(5.7)
Net flows	0.2	(0.6)	0.4	3.7	3.7
Market and other movements	0.1	6.0	1.2	7.2	14.5
Funds under management (at 31 December 2010)	9.1	66.6	8.5	40.8	125.0

OUTLOOK

In the UK, defined benefit pensions trustees are continuing to de-risk their portfolios.  This is likely to lead to a decrease in equity mandates and a resulting increase in fixed income and liability driven investment mandates.  LGIM expects to benefit from this trend as existing clients move assets into higher revenue asset classes and new clients are attracted to LGIM's LDI and fixed income businesses.  LGIM's pipeline of mandated, but not executed LDI transactions is strong. 

LGIM's track record of strong fund performance, customer service and low cost base delivered record profits in 2010 and provides a sound base to export the business model into new asset pools.  The diversification of the business into international markets will continue into 2011.  LGIM America (LGIMA) based in Chicago now manages over $18bn of assets.  LGIMA has built a successful three year track record with strong fund performance across all funds and is now being recommended by an increasing number of pensions consultants in the US.  Furthermore, LGIM has developed distribution capability in the Gulf and mainland Europe where we expect to increase our penetration over the next few years.

The growth in the Group's UK savings and annuity business will also create further opportunities for LGIM to increase its funds under management.

BUSINESS REVIEW - INTERNATIONAL

Financial Highlights £m	2010	2009
USA	85	86
Europe (Netherlands and France)	26	46
Middle East and Asia (Egypt, the Gulf and India)1	(9)	(5)
IFRS Operating profit	102	127
New business APE	146	115
Net cash generation	44	8

1. Includes divisional head office costs.

TRADING PERFORMANCE AND OPERATING PROFIT

New business growth of 27% was driven by strong performances in our emerging markets operations - with a sixth of total international sales now coming from our share of the Indian and Middle East joint ventures.  The US generated a strong sales recovery in term insurance in the second half of the year, and L&G France made significant progress in developing its Group business during the year.

International operating profits were £102m (2009: £127m), taking into account increased investments in our emerging markets business.  Non operating profits were £35m (2009: £26m), driven by profits on the repurchase of debt in the US, and by the strong performance of Dutch fixed interest securities. 

New business margins rose in 2010, particularly in the US, as a consequence of increasing reinvestment yields and the impact of improving new business levels on expense recovery.

Net cash generation by the International division was £44m (2009: £8m), including $53m of dividends from the US and €10m dividends from the Netherlands.  In addition to the effects of capital restructuring already announced, these underlying dividend flows are expected to continue and grow.

LEGAL & GENERAL AMERICA (LGA)

Financial Highlights $m	2010	2009
IFRS Operating profit	132	134
IFRS profit before tax	175	163
New business APE	80	76
Gross premium income	778	765
Net cash generation	53	6
New business margin (%)	8.9	4.9
Embedded value	1,916	1,465

LGA focuses on writing mortality protection products in the term life and universal life markets in the USA.  LGA competes in the protection market by being a low cost operator and delivering expert, medical-based underwriting on higher sum assured policies.  At the end of 2010 LGA had in-force sums assured in excess of $400bn with an average sum assured in excess of $500,000 and in-force premiums of over $770m.

In 2010, US operating profits of $132m (2009: $135m) were marginally below last year in local currency terms, with good investment returns offsetting mortality experience which was not as strong as 2009.

As recently announced the first stage of work on capital restructuring in US has been successfully completed, combining a re-purchase of debt at below par value and using an internal reinsurance solution to re-finance a block of in-force term insurance business.  Over the last two years, this has generated $72m of non operating profits, increased the Group's EEV by £100m and increased regulatory surplus by £82m.  Going forward, it will increase profitability by £8m pa due to lower funding costs.

LEGAL & GENERAL EUROPE

Financial Highlights €m	2010	2009
IFRS Operating profit	30	52
IFRS profit before tax	37	59
New business APE	84	72
Gross premium income	709	718
Net cash generation	12	6
New business margin (%)	0.9	1.2
Embedded value	628	606

In Europe, IFRS operating profits were €30m (2009: €52m).  Our European business comprises Legal & General Netherlands and Legal & General France.

LEGAL & GENERAL NETHERLANDS (LGN)

LGN was established in the mid-1980s.  It now has embedded value of over €300m, achieved by revolutionising the Dutch term insurance market through a combination of market leading pricing and exceptionally high levels of service to higher net worth customers. It also led the development of the "unit linked" savings market by offering transparent, high-quality products providing customers with a wide choice of investment options.  It distributes its products through the Dutch version of Independent Financial Advisers, which includes large independent and bank-owned brokers, and has won numerous awards for its quality approach to business.

LGN profits in 2009 and early 2010 benefited significantly from falls in Dutch bond yields, an element of which was recorded in investment fluctuations and excluded from operating profit.  We have taken action to lock in a substantial element of the profit from these market movements and protect the strong solvency position and dividend paying capacity of the business. The business doubled its dividend in 2010, and, as a result, has contributed more in dividends in the last three years than it has received in capital in its entire history.

New business in the Netherlands was €22m (2009: €25m), with sales of unit linked products slowing in line with the local market, although higher margin term business was less affected.

LEGAL & GENERAL FRANCE (LGF)

LGF has two key business lines, for which products are distributed via separate and dedicated distribution channels.  The first business line is a tailored range of individual savings products (both traditional and unit linked) for a high net worth individual target client base, distributed via a proprietary sales force of around 80 salaried advisers.  The second business line is a range of group risk products (death, disability, medical expenses) which are distributed through an established core network of 300 brokers.

Profits in LGF have improved, due to higher investment margins on savings business. Claims experience on the growing group portfolio held steady, but profits were diluted by the adverse effects of the mix of claims on reinsurance recoveries and the effect of an increase in the state retirement age on disability reserving.

New business in France totalled €62m of APE (2009: €47m) representing 32% growth, well ahead of the market average.  This was principally driven by an increase of over 80% in the levels of group new business, which consists of life, health and disability products.

EMERGING MARKETS

We continue to make modest investments in our developing emerging markets joint venture businesses.  Our principal operating emerging markets business is in India, but we also have small businesses in Egypt and the Gulf states.  We have now obtained regulatory approval to open a representative office in China.

Our bancassurance joint venture in India, IndiaFirst, had a strong first full year of operation, selling over 130,000 policies during the year.  These generated £53m APE, of which the L&G share was £14m.  IndiaFirst was acclaimed for the most successful start-up in the Indian Life insurance market, in terms of the time taken to sell its first 100,000 policies.

OUTLOOK

In 2011, we will continue our focus on increasing return on equity by tight capital management, growing the flow of dividends back to the Group.  The US operation will be central to this where we will continue to execute our capital management programme whilst seeking opportunities to grow and diversify the business.  Elsewhere, new management in France is looking at growth options, and our Dutch operation aims to re-energise its core term offering while developing its non-insurance-wrapped savings business and enter the small corporate pension market.

In emerging markets we will continue to grow our business in India which is progressing well.  We continue to seek suitable distribution partners in large and high growth markets where our preference is for organic market entry.

BUSINESS REVIEW - GROUP

GROUP CAPITAL AND FINANCING

Financial Highlights £m	2010	2009
Investment return	187	191
Interest expense	(121)	(127)
Investment expenses	(3)	(3)
Unallocated corporate expenses	(5)	(4)
IFRS Operating profit	58	57

The Group capital and financing operating profit primarily reflects the smoothed investment return on shareholders' assets held at Group level and in the long term Risk and Savings businesses less interest charges on Group debt.

Investment return was broadly flat at £187m (2009: £191m) and is calculated by taking the average smoothed investment return of 5.8% (2009: 6.4%) on the average balance of invested assets of £3.2bn (2009: £3.0bn).  The amount of invested assets at the end of the year increased to £3.3bn (2009: £2.8bn) as a result of our strong track record of delivering cash from our businesses.

VARIATION FROM LONGER TERM INVESTMENT RETURN

Financial highlights £m	2010	2009
Operating profit	1,002	1,109
Variation from longer term investment return	90	(16)
Property losses attributable to non-controlling interests	-	(19)
Profit from ordinary activities before tax	1,092	1,074

Below the operating profit line, the 2010 investment variance was £90m (2009: negative £16m).  This is analysed as follows: 

In the Risk business, a positive investment variance of £102m resulted from portfolio management within the annuity business. 

In the Savings business, the unit linked deferred tax asset and the amount included in the policyholder liabilities are valued in accordance with different accounting standards.  Consequently in any period a profit or loss impact will occur as a result of the value of the asset changing at a different rate to the liability.  Over time these profits and losses will net to zero.  In 2010, this resulted in an adverse variance of £54m.

The International variance of £35m primarily relates to the gains on the repurchase of the Potomac securities below par as part of the US capital restructure.

In Group capital and financing and Investment management, a positive variance of £7m is primarily due to favourable investment markets in 2010 offset by mark to market effects relating to interest rate hedges on debt issued as interest rates decreased over the year.

BUSINESS REVIEW - CASH GENERATION

SOURCES OF CASH GENERATION

The Group benefits from a range of diversified sources of operational cash generation:

£m		2010 Operational cash generation	2010 New business strain	2010 Net Cash Generation	2009 Operational Cash Generation	2009 New Business strain	2009 Net cash generation
UK long term Annuities		229	60	289	235	129	364
UK long term Protection		216	(70)	146	203	(79)	124
UK long term non profit Savings		77	(70)	7	58	(77)	(19)
UK long term Risk & Savings total		522	(80)	442	496	(27)	469
UK long term with-profits Savings		46		46	46		46
	General insurance	(6)		(6)	13		13
	Investment Savings	21		21	5		5
	Other Risk	-		-	3		3
	Other Savings	(6)		(6)	(3)		(3)
UK IFRS Risk & Savings		9		9	18		18
LGIM		162		162	125		125
International		44		44	8		8
Group Capital & Financing		25		25	33		33
Total		808	(80)	728	726	(27)	699

1.  UK Long term Risk and savings business

The UK long term Risk and Savings businesses comprise annuities, protection, pensions and bonds written in the non profit and with-profits funds.

At the end of 2010, the value of the future undiscounted cashflows in the in-force UK long term Risk and Savings businesses increased to £8.0bn (2009: £7.9bn).  Excluding experience and investment variances this value monetises and is released through into surplus each year with reasonable certainty and forms the basis of the Group's operational cash generation. 

The table below shows the monetisation profile of the UK value in-force (VIF).  In 2011, £690m of VIF is expected to monetise of which £600m is expected to appear in operational cash.  This comprises:

·      The expected flows from the UK non profit business.  These flows represent the operational cash generation of the UK non profit Risk and Savings business and are broadly equivalent to the release of profit using best estimate assumptions.  In 2011, these are anticipated to be £550m;

·      The UK with-profits transfer (representing the shareholders' share of with-profits bonuses) of which approximately £50m is included in operational cash generation in 2011; and

·      The modelled one-off short term capital releases of £90m in 2011 which is expected to manifest itself in experience and/or investment variances and augment the IGD surplus.  These items primarily relate to the modelled benefit of brought forward tax losses in LGAS and, over time, should reduce to zero.

Operational cash generation in periods from 2012 will benefit from new business flows written in 2011 onwards.

Estimated monetisation of UK VIF (undiscounted)1 £m	Total	2011	2012	2013
Non-profit	7,100	620	560	430
With-profit	900	70	70	80
UK VIF monetisation2	8,000	690	630	510
Analysed by
Business in-force at start of year3	7,300
2010 new business cash flows	700	60	50	40
UK VIF monetisation	8,000
Expected future operational cash from UK VIF4		600	630	580

1.             Management estimates. 

2.             The modelled release includes the modelled reduction in deferred tax asset utilisation but excludes the impact of proposed corporation tax changes.

3.             Based on 2010 year end assumptions.

4.             Includes benefit of assumed new business written during the period.

The table below demonstrates how the VIF is being replaced by the new business written in the period and illustrates the movements between the opening and closing UK long term Risk and Savings VIF.  The contribution to VIF from new business written in 2010 and the unwind of the discount rate resulting as cash flows from new business written in previous periods are one year closer to the balance sheet date more than cover the expected releases from the non profit and with-profits businesses.  Over the medium term the experience variances and assumption changes have been positive.

Reconciliation of UK long term Risk and Savings VIF	Discounted1	Undiscounted
Opening VIF at 1 January 2010	3.68	7.9
Contribution from new business	0.32	0.7
Unwind of discount rate	0.30	n/a
Expected release from non profit and with-profits businesses2	(0.57)	(0.6)
Closing  operational VIF at 31 December 2010	3.73	8.0
Experience variances / assumption changes	(0.03)	(0.1)
Investment variance / economic assumption changes	0.18	0.1
Other	0.01	-
Closing VIF at 31 December 2010	3.89	8.0

1.     After cost of capital

2.     Comprises the expected release from non profit business of £522m and with-profits transfer of £46m.

The contribution from long term Risk and Savings new business has grown the VIF on both a discounted and undiscounted basis in 2010.  In every year since 2005, when we first published the analysis of the embedded value, the discounted and undiscounted operational VIF has increased i.e. the contribution from new business written in the period and the unwind of the discount rate on business written in previous periods has exceeded the expected release in the period.

2.  UK IFRS RISK AND SAVINGS BUSINESSES

UK IFRS Risk and Savings operational cash generation is primarily generated by the General insurance (Risk) and Savings Investments businesses.  In 2010, the General insurance business suffered from claims related to a rare severe cold weather event across the UK in December, resulting in a pre tax loss of £8m equivalent to cash consumption of £6m.  In the first half of 2010, the General insurance business made a positive cash contribution of £10m at a combined operating ratio of 90%. 

The change in focus in the Savings business towards sales of unit trusts, ISAs, platform business and structured products resulted in an increase in sales of 46%.  This coupled with continued cost management resulted in a 320% increase in cash generated to £21m (2009: £5m).  Our focus on this business will remain which, coupled with the increase in ISA allowances and an increased awareness of the need to save, will support a continuation of the growth in the Savings Investments business.

3.  LGIM

LGIM's contribution to operational cash generation is defined as operating profit after tax.  This contribution has grown consistently as funds under management have increased from strong net fund inflows and good client persistency.  Further increases in funds under management as the business diversifies into new asset classes and into international markets will help to further grow profits and cash.

4.  INTERNATIONAL

Operational cash generation from international operations is defined as the dividends paid to the Group.  In March 2010, Legal & General America (LGA) paid a dividend of $50m (£33m).  This was the first ordinary dividend paid by LGA for 20 years and, coupled with dividends from the European businesses, led to cash generation of £44m.  We are confident that the dividend flow from the international business is sustainable and we expect dividends to grow going forward.

Reconciliation of operational cash generation to IFRS operating profit
Net cash generation is calculated net of tax and forms an integral component of IFRS profit.  IFRS profit in the year also includes non-recurring experience variances and changes to valuation assumptions which are expected to be neutral over the medium term.

Reconciliation of operational cash to operating profit £m	2010
Operational cash	808
New business strain	(80)
Net cash	728
International profit (less dividends paid)	33
Experience variances, assumptions changes and movements in non-cash items	(5)
Investment gains and losses	32
Investment projects and other	(37)
Operating profit (net of tax)	751
Investment variance	74
Impact of change in UK tax rates	(5)
Profit after tax	820

New Business IRR and Payback Periods

The IRR on protection business decreased to 15% (2009: 17%) as a result of increased competition.  However the payback period remained unchanged at 5 years.  Pricing in the annuities market, whilst not as favourable as in 2009, still remains positive and resulted in an infinite IRR and immediate payback.

In Savings, unit linked bonds and non profit pensions benefited from cost efficiencies and lower commissions.  In unit linked bonds the IRR increased to 11% (2009: 8%) and the payback reduced to 7 years from 9 years in 2009.  In pensions, cost efficiencies and strong growth in new business resulted in lower unit costs and an increase in IRR from 6% in 2009 to 8% in 2010 and a decrease in the payback period to 13 years (2009: 14 years).

New business IRR and payback periods	2010 PVNBP £m	2010 Internal Rate of Return1 %	2010 Undiscounted payback period (years)	2009 PVNBP £m	2009 Internal Rate of Return1 %	2009 Undiscounted payback period (years)
Protection	860	15	5	866	17	5
Annuities	2,065	>302	<02	1,862	>302	<02
Unit linked bonds	586	11	7	677	8	9
Pensions	2,508	8	13	1,804	6	14

1. Internal Rate of Return on new business.
2. Given negative strain on annuity business in 2010 and 2009 and an immediate IFRS payback, the IRR was infinite

Business review - Balance sheet
Capital resources -IGD¹ surplus increased to £3.7bn

The end 2010 IGD surplus of £3.7bn increased from £3.1bn at the end of 2009 due to retained profits in the Group and the impact of the US capital management programme. The reconciliation from 2009 to 2010 is shown below.

IGD Surplus £m	2010	2009
At 1 January	3,148	1,847
Operational cash generation	808	726
New business strain	(80)	(27)
Dividends	(279)	(225)
Experience variances and assumption changes	138	336
Investment variance	46	58
(Increase) / decrease in operational regulatory capital requirement	(155)	89
Release of capital from US capital management programme	132	(50)
Lower tier II debt	-	300
Other	(13)	940
At 31 December	3,745	3,148

As at 31 December 2010 the IGD capital resources of £6.7bn covered the capital resources requirement of £3.0bn by 2.26 times, giving rise to an estimated surplus of £3.7bn.

Capital £bn	2010	2009
Group capital resources	6.7	5.6
Group capital resources requirement	3.0	2.5
IGD surplus	3.7	3.1
Coverage ratio %	226	224

The increase in the Group capital resources to £6.7bn (2009: £5.6bn) is due to two factors.  Firstly, Group capital resources have increased by £0.6bn due to retained profits in the year.  Secondly, the increase in additional capital available in Society is the result of the difference in the valuation of the with-profits fund on a regulatory and IFRS basis.  The increase in the capital resources arising on a Peak 1 basis within the long term fund, relating to the with-profits business is not included in capital and reserves on an IFRS basis.  Under the IFRS basis the net asset value of the with-profits fund is minimal, due to the interaction of the assets, liabilities and unallocated divisible surplus.

Group capital resources requirement increased from £2.5bn to £3.0bn due to the changes in solvency capital outlined over the page.

1. All IGD amounts are estimated, unaudited and after accrual of the final dividend of £201m (2009: £160m).

Movements in UK solvency capital

Movements in net solvency capital requirements are not revenue or expense flows and therefore do not impact profit, distributable reserves or the dividend paying capacity of the Group. As such the movement does not form part of net cash generation but instead is absorbed by or released into the capital stock. Changes in solvency capital requirements are therefore considered in the adequacy of the capital stock and how that impacts potential dividend levels.

Solvency capital is analysed into 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	2010	2009	Change
Risk	1.54	1.41	0.13
Savings	0.08	0.08	-
With-profits - operational	0.65	0.65	-
Other subsidiaries	0.40	0.38	0.02
Operational group capital resources requirement	2.67	2.52	0.15
With-profits insurance capital component (WPICC)	0.28	-	0.28
Group capital resources requirement	2.95	2.52	0.43

The increase in the Risk capital requirement to £1.5bn (2009: £1.4bn) is primarily due to the increase in annuity reserves and the reinsurance of certain blocks of the US business prior to 2005 into Legal & General Assurance Society.

The analysis of the movement in solvency capital is shown below. 

Change in Pillar 1 capital requirement £bn	2010	2009	Change
At 1 January	2.52	2.61
Increase in operational solvency capital	0.15	0.13
Increase / (decrease) in non operational solvency capital (WPICC)	0.28	(0.22)
At 31 December	2.95	2.52	0.43

Liquidity

Legal & General has a limited appetite for liquidity risk and maintains at Group level sufficient liquid assets and standby facilities to meet a prudent estimate of the Group's cash outflows over a period of two years, as identified through annual planning processes and taking 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.  The liquidity position across our operational business units is very strong.  On average during 2010, across the Group, a daily average cash balance of circa £1bn of overnight cash deposits was maintained as well as carrying significant holdings of liquid assets.

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 as and when required.  As at 31 December 2010 the Group had in place undrawn committed syndicated and bilateral facilities in excess of £1bn provided by a number of the Group's key relationship banks, maturing in 2012.  The Group has no outstanding bonds that mature before 2015.  There are no restrictive covenants and no credit rating or share price triggers in respect of group debt or liquidity positions.

Business review - Risk management

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 we are rewarded for and understand deeply, 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.

ECONOMIC RISK
Interest rate risk

Interest rate movements can impact the value of the assets we hold to meet insurance obligations.  The UK has experienced a prolonged period of low interest rates.  For firms that wrote investment products with un-hedged interest rate guarantees, this has created significant liabilities.  Legal & General has limited appetite for such guarantees. We seek to ensure that we hedge such risks in the market at point of sale, although we accept that from time to time we may accept such risks for commercial reasons. We set clear risk limits for such risks which all Group businesses must adhere to.

The effect of a 1% increase in interest rates is to reduce Group Embedded Value by £206m (2009: £76m) and decrease Group New Business Contribution by £22m (2009: £14m).  High interest rates may have secondary effects on the Group including stimulating savings into deposit accounts and increasing demand for annuities.  A 1% decrease in interest rates would increase Group Embedded Value by £209m (2009: £39m) and increase Group New Business Contribution by £25m (2009: £7m).  Low interest rates may have secondary effects on the Group including stimulating demand for non-deposit based savings and reducing demand for annuities.  Overall the Group perceives our exposure to interest rate risk to be low.

Inflation risk

Many insurance contracts have premiums or benefits linked to changes in inflation (often expressed as a link to Retail Prices Index (RPI) or Consumer Prices Index (CPI) or Limited Price Inflation (LPI)).  For Legal & General, we only have an appetite to accept inflation risk that is adequately rewarded.  In our annuity business the majority of inflation risks are hedged by buying assets or derivatives to match liabilities, including inflation linked bonds, swaps and property sale and lease back transactions. For commercial reasons we may accept inflation risk from time to time, within strict limits.

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 appropriately match long term assets and liabilities, exposures can arise to the issuers of corporate debt and other financial instruments. As part of our day to day business we also have exposures to banking, money market and reinsurance counterparties, as well as the providers of investment settlement and custody services. Third party risks also arise through reliance upon external suppliers for certain administration services.

The Group seeks to limit the potential exposure to loss from counterparty and third party failure through setting robust selection criteria and exposure limits covering factors such as counterparty financial strength, sectors and geography. Exposures against limits are actively monitored, with trigger levels being set and management action being taken to pre-empt loss from default events.

MARKET RISK
The performance of the assets we hold impacts our earnings and profitability.  Worldwide assets under management at 31 December 2010 were £365bn of which shareholders have direct exposure to 9% or £34bn.  The shareholder portfolio remains of high quality. The assets backing the UK non profit annuity business within Legal & General Pensions Limited (LGPL) represent the majority of the Group's fixed interest exposure and are backed by a £1.5bn default provision equivalent to 64bps of defaults per annum over the life of the portfolio.  No defaults were experienced in 2010.  The shareholder portfolio is only exposed to £1.0bn of equities.  A 40% fall in equities would reduce the IGD surplus by an estimated £0.5bn (2009: £0.6bn).

Asset classes	LGPL	Other UK non profit insurance business	Other insurance business	Society shareholder capital	Other Group capital	Total
Bonds	23.4	0.2	2.9	1.2	1.2	28.9
Equities	-	-	-	1.0	-	1.0
Derivative assets	1.1	0.3	-	-	0.3	1.7
Property	0.1	-	-	0.1	-	0.2
Cash (including cash equivalents)	0.5	0.1	0.4	0.9	0.7	2.6
Total	25.1	0.6	3.3	3.2	2.2	34.4

BOND INVESTMENTS

The credit quality of the portfolio remains high, with 98% of the rated bonds being investment grade.  The portfolio is also well diversified by both sector and geography with 61% of LGPL's exposure now domiciled outside the UK including 32% held in North America and 23% in Europe.  Exposure to overseas currency and interest rate risk is managed through the use of derivative programmes. 

SOVEREIGN DEBT

At the end of 2010, LGPL's exposure to sovereign debt was £3.0bn.  Of this, only £30m was invested in sovereign debt issued by Portugal, Ireland, Greece and Spain, representing 0.1% of the total LGPL bond portfolio.  We continue to closely monitor our exposures to these currencies. 

BANK SECURITIES

The Group has maintained a relative underweight position in banks in comparison to both global and local market index weightings.  LGPL's exposure to bank hybrid debt from Portugal, Ireland, Greece and Spain represented significantly less than 0.5% of the total bond portfolio.

COLLATERALISED DEBT OBLIGATIONS (CDO)

The value of our CDO investments at 31 December 2010 was £1.0bn.  Of this total, £0.9bn relates to internally managed CDOs which are super senior tranches of bespoke structures constructed and managed by Legal & General to provide enhanced yield with significant protection against default.  The default losses on the reference portfolio would have to exceed 28% on average across the four CDOs before the CDOs incur any default losses.  The underlying reference portfolios have experienced no reference entity defaults in 2010.

ASSET BACKED SECURITIES (ABS)

Within the bond portfolio, ABS investments stood at a market value of £4.9bn at 31 December 2010 compared to £4.4bn at the end of 2009.  The portfolio of ABS investments remains defensive, with the majority of the structured finance exposure to either UK based infrastructure or secured bonds. These are high quality assets that were selected for their long duration and risk diversification.  Within this total, £1.6bn are categorised as traditional ABS investments, including RMBS and CMBS (of which only £18m is sub-prime). 

DURATION MATCHING AND REINVESTMENT RISKS

Asset and liability durations are managed to be closely matched with minimal appetite for mismatch risk.  For the LGPL portfolio, asset duration is 11 years and liability duration 12 years.  Where full matching is not possible, a prudent reinvestment rate is assumed.

MORTALITY, CATASTROPHE AND OTHER ASSUMPTION UNCERTAINTIES

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 and credit defaults.  Household insurance business requires assumptions to be made for factors such as extreme weather events and other catastrophic risks.  We undertake significant analysis of risks to ensure our reserves for those risks are appropriate.  However, extreme adverse events may impact unfavourably on profitability and capital.  For example, a pandemic would result in significant death claims on protection contracts or a rapid advance in medical science could lead to significantly enhanced annuitant longevity which may require assumptions to be recalibrated.

ANNUITANT MORTALITY

In recent years Legal & General has focused on developing a deep understanding of these risks, notably UK longevity and mortality which is our principal risk exposure in this space.  In 2010, we increased mortality reserves by a net £59m to update for current year experience and to bring our annuitant mortality assumptions in line with the latest methodology from the Continuing Mortality Investigation Bureau (CMIB).

REGULATORY AND LEGISLATION RISK

There are a number of regulatory changes which will impact the business over the next five years.  We proactively engage with regulators as new initiatives are developed with the aim of ensuring that new regulation is both proportionate to the risks it aims to mitigate and that the full impacts are considered before implementation.

SOLVENCY II

Solvency II is the introduction of a new, European wide, capital regime for insurers.  It has been in development for several years and is expected to be implemented in January 2013.  The lack of clarity regarding the new regime creates significant uncertainty for the Group with a number of key areas remaining unresolved.  We have been actively engaging with regulators in Europe and the UK and with the UK Government.  Over the last 12 months we have seen a number of positive developments from within the European Solvency II programme regarding the impact on our business but remain cautious until a final set of regulations are published.  The European industry has recently submitted its response to the Commission's latest Quantitative Impact Study (QIS5), which was a test of a particular calibration of capital rules.  The results of QIS5 were published in March 2011 however we do not expect clarity to emerge until later in 2011 when the detailed implementation rules for Solvency II (which may be materially different to the QIS5 specification) should be published.

For our annuity business, proposals may require firms to hold a disproportionate amount of capital relative to the risk exposure.  Whilst transitional arrangements will apply, the scope and duration of these remain undecided.

RETAIL DISTRIBUTION REVIEW (RDR)

The Retail Distribution Review is a UK wide change to the regulation surrounding the distribution of retail investment products which is due to be implemented in December 2012.  The principal changes are to replace commission payments to advisors for the advice and sale of retail investment products with advisors contracting directly with customers for advice fees, to increase the qualifications required for advisors, to increase the quantum of capital required in advisor firms and to introduce a new two tiered advice structure of independent and restricted advice.  RDR will bring significant changes to our products and distribution processes, and poor execution of the changes could impact earnings and profitability.

We anticipate a fall in independent advisor numbers as a result of RDR and an increase in restricted advice models as well as execution only (direct) transactions.  We believe that the Group's distribution model is well placed to benefit from the implementation of RDR.  We have moved our IFA franchise towards fee based and fund based models which will be less affected by RDR.  We expect that some banks will be beneficiaries from RDR; our  bank distribution franchise positions us well here and our strong brand and customer service track record will mean we are well placed to benefit from any growth in direct demand.  We may need to invest in additional digital platform capability to compete in the post RDR environment.

NATIONAL EMPLOYMENT SAVINGS TRUST (NEST)

NEST is a new government sponsored national pension scheme aimed at employers who currently do not offer access to a pension scheme to their employees.  It will be implemented in October 2012 when larger employers will need to offer their employees a NEST pension or suitable commercial alternative.  Alongside implementation of NEST, auto enrolment to group pension schemes will be introduced whereby employees will need to actively opt out of being a scheme member. 

We do not see NEST or auto-enrolment as a major threat to our corporate pensions business, rather a growth opportunity.  Our target market is larger employers who often already have a pension scheme in place and who are attracted to the proposition which we offer, including access to SIPP products for senior employees and Group ISA arrangements for those employees who wish to save through alternative tax advantaged product structures.  The introduction of auto enrolment will stimulate growth in pension membership amongst our existing client base as well as creating further opportunities to win new business mandates in our target markets.

ACCOUNTING CHANGES
The International Accounting Standards Board's (IASB's) project on accounting for insurance contracts, which seeks to improve and ensure consistency in accounting, is targeted for completion in mid 2011.  If the IASB are able to meet this challenging timetable, the implementation date is likely to be between 2013 and 2015. Proposals are currently subject to the due process of the IASB.  Whilst we support the need for clear and consistent financial reporting, the proposals of the latest exposure draft would result in a significant change in the timing of profit recognition, inconsistencies with capital measurement under Solvency II and increased complexity for users of accounts.  We are working with the IASB, the European CFO Forum and the Association of British Insurers to ensure that the IASB proposals are appropriate to the insurance sector and meet the needs of investors.

EUROPEAN COURT OF JUSTICE RULING ON GENDER BASED PRICING
On 1 March the European Court of Justice (ECJ) ruled that the use of gender in pricing insurance contracts would be unlawful from 21 December 2012.  We view this ruling as unhelpful to UK consumers, many of whom will end up paying more to mitigate risks where gender is an appropriate risk factor.  Pricing will need to be adjusted to reflect these changes but it is too early for us to assess the impact on new business margins.

There is an increasing trend for legislative intervention, bringing potential for forced changes to our businesses potentially increasing the costs of our products to our customers and any retrospection impacting required resources of our insurance business.

UK FINANCIAL SERVICES SECTOR CONTAGION RISKS

As a UK based Group, earnings are influenced by the perception of the UK financial services sector as a whole.  Factors such as investment market performance, actions by regulators against organisations operating in our sector, and shock events, including matters such as significant market failures, can impact the confidence of retail investors in the sector as a whole and their purchase or retention of financial service products.

We continue to seek to differentiate our business model from that of our competitors. This includes a diversified portfolio of risk, savings and investment management businesses in the UK. In addition, we are focused on developing our international businesses, with joint ventures in India and the Gulf, complementing our existing portfolio of overseas activities.

 

Supplementary EEV disclosure

Analysis of EEV results - covered business £m		PVNBP		Margin %		Contribution
		2010	2009	2010	2009	2010	2009
Risk		2,925	2,728	10.3	10.4	300	285
Savings		3,934	3,676	0.8	0.5	33	20
International		1,017	876	4.3	2.6	44	23
Total		7,876	7,280	4.8	4.5
Contribution from new business						377	328
Expected return from in-force business						527	614
	Persistency					(31)	(62)
	Mortality / morbidity					(53)	147
	Expenses					(11)	22
	Other					211	113
Experience variances and assumption changes						116	220
Development costs						(15)	(30)
Contribution from shareholder net worth						160	141
Operating profit on covered business						1,165	1,273
Business reported on an IFRS basis						59	46
Operating profit						1,224	1,319

Analysis of EEV results - worldwide business £m
	2010	2009
Risk	663	913
Savings	204	77
Investment management	179	144
International	163	170
Group capital and financing	54	47
Investment Projects	(39)	(32)
Operating profit	1,224	1,319
Variation from longer term investment return	161	(413)
Effect of economic assumption changes	292	(335)
Property losses attributable to non-controlling interests	-	(19)
Profit from ordinary activities before tax	1,677	552
Tax and other	(413)	(55)
Profit from ordinary activities after tax	1,264	497
Earnings per share (p)	21.71	8.86
Shareholders' equity	7,730	6,695
Number of shares (m)	5,867	5,862
Shareholders' equity per share (p)	132	114

OPERATING PROFIT

EEV operating profit decreased by 7% to £1,224m in 2010 (2009: £1,319m).  This decrease reflects the unwind of a lower opening risk discount rate on a lower opening in-force value in the UK coupled with, in 2009, favourable mortality experience in the Risk business. 

NEW BUSINESS CONTRIBUTION

Contribution from worldwide new business increased to £377m (2009: £328m), growth of 15%. The margin on this business improved to 4.8% (2009: 4.5%) benefiting from cost efficiencies, lower commissions and growing scale in our businesses.

Risk

New business margin %	2010	2009
Protection	6.4	7.9
Annuities	11.9	11.7
Risk	10.3	10.4

The increased competitive environment in the protection market in 2010 was only partially offset by improved reinsurance terms, expense reductions and favourable new business mix.  This led to a drop in the new business margin to 6.4% (2009: 7.9%). The IRR on protection new business was 15% (2009: 17%) with an unchanged payback period of 5 years.

The annuities margin increased to 11.9% (2009: 11.7%).  Despite pricing conditions not being as favourable as 2009, the extension of our distribution reach enabled selective targeting of more profitable sectors. Given positive strain on this business, annuities had an immediate IFRS payback and an infinite IRR in both 2010 and 2009.

Savings

New business margin %	2010	2009
Unit linked bonds	1.4	(0.6)
Non profit pensions	0.1	(0.6)
With-profits	2.6	2.9
Savings	0.8	0.5

The focus on new business growth, cost management and change in strategy from commission paying products to fee-based products has had a profound effect on non profit savings new business margins from negative margins in 2009 to positive margins in 2010.

In unit linked bonds, these actions were reflected in a margin of 1.4% in 2010 (2009: negative 0.6%).  This translates into an IRR of 11% (2009: 8%) and a payback period of 7 years (2009: 9 years).

In non profit pensions, the increase in new business volumes particularly in the fee-based workplace pensions market has lowered unit costs and increased the margin to 0.1% in 2010 (2009: negative 0.6%).  This equates to an IRR and payback period of 8% and 13 years respectively (2009: IRR 6%, payback period 14 years).

The with-profits margin has reduced slightly from 2.9% in 2009 to 2.6% in 2010.

International

New business margin %	2010	2009
USA	8.9	4.9
Netherlands	1.4	2.7
France	0.6	0.1
International	4.3	2.6

The consolidated International new business margin increased to 4.3% in 2010 (2009: 2.6%).  This was driven by an increase in the USA to 8.9% (2009: 4.9%) as a result of improvements to cost management and higher reinvestment assumptions.

Market and regulatory conditions in the Netherlands remain depressed whereas in France new insurance business increased by 21% in 2010 which has lowered unit costs and increased margins.

IN-FORCE CONTRIBUTION

The expected return from in-force business decreased to £527m (2009: £614m) due to the unwind of a lower opening discount rate (8.0% vs 8.3%) applied to a lower opening in-force value in the UK.

Positive experience variances and assumption changes in our worldwide Risk and Savings businesses of £116m (2009: £220m) included:

Persistency: negative £31m (2009: negative £62m).  This reflects the strengthening of lapse assumptions for non profit pensions.

Mortality/morbidity/longevity: negative £53m (2009: £147m).  This reflects adverse annuitant mortality assumption changes to update for current year experience and to bring the mortality assumptions in line with the latest CMIB methodology partially offset by a release in the protection business.

Expenses: negative £11m (2009: £22m), reflecting small adverse variances in the International businesses.

Other: £211m (2009: £113m). This includes a reassessment of future BPA reserve release as data is loaded onto the BPA system (£59m), internalised financing costs resulting from the US capital restructure (£46m), the unwind of the cost of capital in the UK (£54m) and one-off modelling improvements and other experience variances (£52m).

INVESTMENT MANAGEMENT

The Investment management business is reported on an IFRS basis; operating profit of £179m (2009: £144m) excludes £27m (2009: £28m) 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

Operating profit from Group capital and financing represents profit on the shareholder assets held within the covered business, reported on an embedded value basis and profit on the shareholder assets held outside the covered business reported on an IFRS basis. The profit from Group capital and financing increased to £54m in 2010 (2009: £47m) as a result of higher average invested assets throughout 2010.

PROFIT BEFORE TAX

Profit before tax includes the variation from longer term investment return and the effect of economic assumption changes.  EEV profit before tax was £1,677m (2009: £552m).

The variation from longer term investment return improved to £161m in 2010 from a negative variance of £413m in 2009.  This was primarily due to improved market conditions throughout 2010.

The positive effect of economic assumption changes amounted to £292m (2009: negative £335m). This includes £341m relating to the decrease in the UK risk discount rate in 2010 to 7.3% from 8.0% and £39m relating to the fall in the expense inflation assumption offset by negative £138m relating to lower expected returns and higher cost of capital.

Enquiries

Investors:
Matt Hotson	Director, Investor Relations & Strategy	020 3124 2150
Adrian Liew	Investor Relations Manager	020 3124 2044
Ching-Yee Chan	Investor Relations Executive	020 3124 2345
Media:
John Godfrey	Group Communications Director	020 3124 2090
Richard King	Head of Media Relations	020 3124 2095
James Bradley	Tulchan Communications	020 7353 4200
Mal Patel	Tulchan Communications	020 7353 4200

 

Notes

A copy of this announcement can be found in "Results", under the "Financial information" section of our shareholder website at http://www.legalandgeneralgroup.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.  Investors should dial [phone].  The passcode is "L&G Results".

There will be a further teleconference at 15.00 GMT (10.00 EST) to answer specific technical and accounting questions. Investors should dial [phone].

FINANCIAL CALENDAR 2011	DATE
Ex dividend date	20 April 2011
Record date	26 April 2011
Q1 Interim Management Statement 2011	4 May 2011
Annual General Meeting	25 May 2011
Payment date of 2010 final dividend	1 June 2011
Half Year Results 2011	3 August 2011

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.

Directors' Responsibility Statement (extracted from the 2010 annual report and accounts)

The directors are responsible for preparing the Directors' Report, including the Directors' Remuneration Report, and the Group and parent company financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year.  Under that law, the directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and the parent company financial statements in accordance with UK Accounting Standards (UK Generally Accepted Accounting Principles) and applicable law.  In preparing the Group financial statements, the directors have also elected to comply with IFRS issued by the International Accounting Standards Board (IASB). Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and the group and of the profit or loss of the Group for that period.  In preparing these financial statements, the directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      make judgments and estimates that are reasonable and prudent;

·      state that the Group financial statements comply with IFRS as adopted by the EU and IFRS issued by the IASB, and with regard to the parent company financial statements, that applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

·      prepare the Group and parent company financial statements on the going concern basis unless it is inappropriate to presume that the Group and parent company will continue in business, in which case there should be supporting assumptions or qualifications as necessary.

The directors are responsible for keeping proper accounting records that are sufficient to show and explain the Group and company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and parent company and enable them to ensure that the Directors' Remuneration Report and the financial statements comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and for taking such reasonable steps to prevent and detect fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the information included on the Group's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement

Each of the directors listed below confirms that to the best of their knowledge:

(a) the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the Group as a whole; and

(b) the directors' report includes a fair review of the development and performance of the business and the position of the company and Group as a whole, together with a description of the principal risks and uncertainties that they face.

J. M. Stewart	Chairman		N.E.T. Prettejohn	Non-Executive Director
T.J. Breedon	Group Chief Executive		H.E. Staunton	Non-Executive Director
Dame C.H.F. Furse	Non-Executive Director		J.M. Strachan	Non-Executive Director
M.J. Gregory	Group Executive Director (Savings)		Sir D.A. Walker	Vice Chairman
R.H.P. Markham	Non-Executive Director		N.D. Wilson	Group Chief Financial Officer
J.B. Pollock	Group Executive Director (Risk)

 

END

 

 

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