L&G Full Year Results 2015 Part 1

RNS Number : 0687S

Legal & General Group Plc

15 March 2016

 

Stock Exchange Release                                                                                                               

15 March 2016

net cash up 14%, roe¹ 17.7%, dividends up 19%

financial highlights: 

 

·      Net cash GENERATION up 14% to £1,256m (2014: £1,104m)

·      OPERATING PROFIT up 14% to £1,455M (2014: £1,275m)

·      Profit AFTER tax up 10% to £1,094m (2014: £992m)

·      adjusted Earnings per share² UP 11% to 18.58P (2014: 16.70p)

·      FULL YEAR DIVIDEND UP 19% TO 13.40P PER SHARE (2014: 11.25p)

·      SOLVENCY II surplus³ of £5.5bn: coverage RATIO OF 169%

·      economic capital surplus of £7.6bn: coverage ratio of 230%

business highlights:

·      lgim AUM up 8% to £746.1BN (2014: £693.7BN)

·      LGIM EXTERNAL AUM NET FLOWS of £37.7BN (2014: £7.5BN)

·      lgr new business OF £2.9BN (2014: £6.6BN)

·      group-wide DIRECT INVESTMENTs UP 22% TO £7.0BN (2014: £5.7BN)

·      UK RETAIL PROTECTION PREMIUMs UP 5% to £1,112m (2014: £1,056M)

·      LGA PREMIUMS UP 6% to $1,183m (2014: $1,117m)

Nigel Wilson, Group Chief Executive, said:

"Legal & General delivered excellent growth in cash, profits and dividends in 2015: Net cash generation and Operating Profit were both up by 14%, EPS was up 11 % and we are increasing the dividend by 19%. Over the last 4 years we have delivered sustained growth, Net Cash has increased 10%, EPS has increased 11% and the dividend increased by 20% on average each year.

We had already moved to a capital-lite model for UK pension risk transfer business in anticipation of the new Solvency II regime and we will use our Solvency II surplus capital of £5.5bn to continue to deliver on our strategy. We have a robust business model which has proved to be adept and resilient in dealing with fiscal and regulatory changes in our sector.  We are planning for more global economic and market volatility and are well positioned for continued pressure on pricing and changes in product mix in our industry.

Our strategy is aligned to growth for our markets, meeting our customers' needs and delivering socially useful products. We remain confident in the outlook for our business."

1.   Return on equity is calculated by taking profit after tax attributable to equity holders of the Company, divided by the average shareholders' equity during the period. This excludes a £25m net loss in relation to the disposals of Legal & General France, Legal & General Gulf, Legal & General Egypt and Legal & General International (Ireland).

2.   Adjusted earnings per share is calculated by dividing profit after tax by the weighted average number of ordinary shares in issue during the period, excluding the £25m loss as per note 1. Unadjusted earnings per share was 18.16p (2014: 16.70p).

3.   Solvency II position on a proforma basis as at 31 December 2015 and before the accrual of the final dividend.

GROUP FINANCIAL SUMMARY

IFRS £m		2015	2014	Growth %
Analysis of operating profit
Legal & General Retirement		639	428	49
Legal & General Investment Management		355	321	11
Legal & General Capital		233	203	15
Insurance		293	370	(21)
Savings		99	105	(6)
Legal & General America		83	56	48
Operating profit from divisions		1,702	1,483	15
Group debt costs		(153)	(142)	(8)
Investment projects and expenses		(94)	(66)	(42)
Operating profit		1,455	1,275	14
Investment and other variances (inc. minority interests) 1		(100)	(37)	(170)
Profit before tax attributable to equity holders		1,355	1,238	9
Adjusted earnings per share (p) 2		18.58	16.70	11
IFRS earnings per share (p)		18.16	16.70	9

1.    Investment and other variances include a £25m net loss resulting from the sale of Legal & General France, Legal & General Gulf, Legal & General Egypt and Legal & General International (Ireland).

2.      Adjusted earnings per share is calculated by dividing profit after tax by the weighted average number of ordinary shares in issue during the period, excluding the £25m loss as per note 1.

OPERATIONAL AND NET CASH GENERATION £m		2015	2014	Growth %
Operational cash generation		1,217	1,101	11
New business surplus		39	3	1,200
Net cash generation		1,256	1,104	14

SOLVENCY II CAPITAL £bn3				2015
Eligible own funds				13.5
Solvency capital requirement				(8.0)
Surplus				5.5
SCR coverage ratio (%)				169

3.    Solvency II position on a proforma basis as at 31 December 2015 and before the accrual of the final dividend.

ECONOMIC CAPITAL £bn4		2015	2014	Growth %
Eligible own funds		13.5	12.5	8
Economic capital requirement		(5.9)	(5.5)	(7)
Surplus		7.6	7.0	9
1-in-200 coverage ratio (%)		230	229	1

4.      Economic capital is the amount of capital that the Board believes the Group needs to hold, over and above its liabilities, in order to meet the Group's strategic objectives. Our Economic Capital model has not been reviewed by the Prudential Regulatory Authority (PRA), nor will it be.

DIVIDEND - 19% INCREASE, progressive policy going forward

The Board has confidence in the strength and growth prospects for the business. This underpins the Board's recommendation of a final dividend of 9.95p (2014: 8.35p) giving a full year dividend of 13.40p (2014: 11.25p), 19% higher than 2014. This reflects a net cash cover of 1.58 times.

The Board has adopted a progressive dividend policy going forward reflecting the Group's expected medium term underlying business growth, including net cash generation and operating earnings.

CAPITAL - S2 surplus: £5.5bn, ec surplus: £7.6bn

The Group's Solvency II surplus was £5.5bn, representing a coverage ratio of 169%. The Group has set a preferred  Solvency II coverage ratio of greater than 140%. The economic capital surplus was £7.6bn, representing a coverage ratio of 230%. We remain disciplined in ensuring we deliver our required rates of return on the capital we choose to deploy, particularly in respect of UK pension risk transfer business.

strategy - five long term growth drivers

In addition to our institutional insurance businesses, Legal & General is increasingly serving its corporate, institutional and retail customers through our asset gatherer businesses of LGIM, LGR and LGC. These businesses are working together to deliver consistent, sustainable and attractive growth.  We are executing our clear and focused strategy based on five key long term growth drivers:

1)  AGEING POPULATIONS

The demand for de-risking strategies remains high and the opportunity remains significant for Legal & General as a market leader in both the UK and US. We are well placed to deploy our unique and integrated specialist experience in longevity, investment management and asset transitioning, across LGR, LGIM and LGC. In addition we have a panel of 11 counterparty reinsurance partners to execute transactions in a capital and risk efficient manner.  Our entry into the equity release market (lifetime mortgages) provides an additional high quality long duration asset with enhanced risk adjusted returns to back the Group's annuity liabilities.

2)  Globalisation of asset markets

Investors worldwide are increasingly looking to global asset managers and markets to satisfy their requirements for value, yield, risk management and service. LGIM, the 15^th largest asset manager globally with around a 1% share of the global market, is expanding internationally through its three manufacturing hubs in the UK, US and Asia as well as expanding its distribution footprint. In 2015 we won new mandates in Korea, Taiwan and Japan.

3)  creating real assets

Legal & General Capital (LGC) is utilising the Group's shareholder funds to take significant stakes in strategic businesses to enhance risk adjusted returns. LGC is investing in sectors that are economically crucial and require long term finance, such as infrastructure and UK housing and suffer from a multi-billion pound financing gap. In doing so, we are able to originate a pipeline of assets to back our long term annuity liabilities, which have predictable liquidity requirements in LGR and co-investment opportunities with the LGIM client base.

4)  Welfare reform

Governments worldwide are stepping back from welfare provision and it is increasingly likely that employers and individuals will have to fill this need. In the UK, auto-enrolment has been the successful prototype for this model, with 90% of members choosing to stay enrolled and defined contribution (DC) assets expected to triple in the next 10 years. We have had notable success with major employers reviewing their DC provider including John Lewis and Tesco. As a result we now have 1.8m customers on our Workplace Savings platform.

5)  Digital

We are addressing the opportunities and challenges presented by digital developments, which both shape the ways in which we interact with our customers and present opportunities to significantly reduce unit costs. Our market leading retail protection business has straight through processing of around 80%, we re-platformed our lifetime mortgages proposition for less than £500k. In India simple products supported by digital technology resulted in two million new insurance customers in three months during 2015 and in housing, we will use technology to build innovative modular homes.

OUTLOOK

Our strategy is designed to deliver sustainable growth in cash, earnings and RoE. Our business model enables us to grow across an increasingly wide range of asset and insurance markets, giving us additional optionality. This model is increasingly led by the gathering and management of assets and includes internationalising our investment management and retirement propositions, as well as successfully entering the UK lifetime mortgage market and creating long term institutional asset classes.

We believe that by aligning our strategy to growth drivers together with our diversified revenue streams, creates resilience. No model however can be completely immune from slowing global growth and continuing market uncertainty.

We expect international demand for de-risking strategies to remain strong. The pension risk transfer (PRT) market continues to grow as corporates seek to reduce or remove their exposure to their legacy defined benefit pension liabilities, estimated at approximately $9 trillion globally.  We see growing demand for our skills in asset management, liability management, complex administration and deal execution. LGR will apply these skills as a direct insurer in the US through LGA, and as a reinsurer through LGRe in other markets initially focusing on the Netherlands.

Volumes of pension risk transfer business we choose to write in 2016 and beyond remain dependent on meeting our return on capital hurdle rates, including those based on Solvency II capital. We anticipate that the Solvency II regime will create annuity back book consolidation opportunities. We expect our own existing £43bn back book of annuity assets to generate strong levels of profit for many years, enhanced by an increasing proportion of assets allocated to risk adjusted, yield enhancing, direct investments.

Following our successful entry into the lifetime mortgage market we expect to write up to £500m of lifetime mortgages new business in 2016. We expect individual annuity sales to remain at current levels.

In LGIM we are well placed to continue generating strong net inflows across a range of products, channels and regions. In the UK, demand for LDI, Multi Asset, Real Asset and Fixed Income strategies is expected to remain strong. LGIM's strategy is based on being a low cost scalable provider of fund management products and as such is well placed to be a net beneficiary from the expected pricing pressure across the asset management market. We expect retail sales to continue to improve, and also expect to increase the number of full service customers on our Defined Contribution platform to around 2m by the end of 2016. Internationally we are expanding our distribution in the US, Asia, the Gulf and Europe and are well positioned to continue our positive international momentum.

LGC will continue to invest strategically into businesses that require long term investment, utilising the long term nature of the Group's liabilities and capital requirements, whilst providing wider benefit to the Group with improved access to additional assets and fee earning opportunities. To date the Group has invested £7.0bn and we intend to invest up to £15bn in the medium term across our areas of focus: housing; urban regeneration; alternative finance and clean energy.

We see further opportunities in the UK insurance market. In retail protection we remain the market leader in a mature market, however we see the potential to grow as it becomes more digital and direct.  In our Group protection business we are exploring ways of providing additional protection products through our Workplace proposition. 

In UK Savings we have over two million UK customers and £102bn of administered assets. We will focus on simplifying our business model to deliver cash generation and profits to the Group.

LGA protection new business volumes are expected to be 10% lower in 2016 than in 2015 as LGA focuses on increasing margins and sustaining strong cash generation to the Group. More broadly for further US pension risk transfer business, LGA will continue to provide the regulatory balance sheet, administrative services and payments to annuitants for LGR America and back office support for LGIM America.

For 2016 we expect to deliver a further increase in operational cash generation of 6-7% across the areas that we provide guidance for: LGR, LGA, LGC, Savings and Insurance excluding General Insurance.

LEGAL & GENERAL RETIREMENT

FINANCIAL HIGHLIGHTS £m			2015	2014
Operational cash generation			372	292
New business surplus			45	51
Net cash generation			417	343
Experience variances, assumption changes, tax and non-cash movements			222	85
Operating profit			639	428
Bulk annuity single premiums1			2,417	5,987
Individual annuity single premiums			327	591
Lifetime mortgage advances			201	-
Total LGR new business			2,945	6,578
Annuity net inflows (£bn)			0.4	4.4
Bulk annuity assets (£bn)			29.0	29.1
Individual annuity assets (£bn)			14.4	15.1
Total annuity assets (£bn)			43.4	44.2
of which: direct investments			5.5	4.6
Longevity insurance gross premiums			326	333

1.       In addition to the 2014 reported bulk annuity single premium we completed the internal transfer of £1,953m of annuities from with-profits to our shareholder fund in July 2014.

back book for cash, diversified new business

Operational cash generation increased 27% to £372m (2014: £292m) reflecting the increased scale of the business. New business surplus of £45m (2014: £51m) resulted from our continued ability to source attractively priced assets, with the introduction of lifetime mortgages and further direct investments.  New business surplus further benefited from our selected use of longevity and asset reinsurance in 2015 as our business model evolves to reflect the size of the market opportunities and the impact of the Solvency II regime.

Operating profit increased 49% to £639m (2014: £428m) reflecting both the increased scale of the business and the capital-lite model we are deploying for new annuity business. Operating profit further benefited by £18m from higher annuitant mortality experience and by £97m from changes in reserving assumptions for individuals who have deferred taking a pension past their assumed retirement date.  In particular, for this group our reserving now assumes mortality rates in line with the rest of our book and slightly reduced late retirement factors to reflect lower interest rates.

We will continue to use direct investments and selective de-risking actions to actively manage our annuity back book. As a result our expectation is that the back book should be able to generate strong levels of profit for many years. Direct investments backing our annuity business increased 20% to £5.5bn (2014: £4.6bn). 

international diversification

LGR has internationalised its business in 2015, with entry into the US and European pension risk transfer markets, significantly enhancing optionality. The US market particularly provides a significant opportunity for further growth.

We completed our first US pension risk transfer deal in October 2015, a $900m group annuity contract shared equally with The Prudential Insurance Company of America. Legal & General Retirement America (LGRA) benefits from the strong support and close links with Legal & General's other US businesses.  Going forwards all pensions administration services will be provided by Legal & General America (LGA) using an in-house defined benefit pensions administration capability that was developed and implemented in 2015.  Fund management services will be provided by LGIM America (LGIMA).  LGRA delivered its second pension risk transfer (PRT) deal in February 2016, a $65m pensioner buy-out.

We also completed our first PRT transaction in the Netherlands in December 2015, a €200m deal with ASR Nederland NV (ASR) and Hannover Re. In 2014 we established a global reinsurance hub, Legal & General Re (LGRe), to facilitate the growth of our international pension risk transfer business and this entity took on the pension obligations in respect of our deal with ASR.

IMPLEMENTATION OF UK CAPITAL-LITE FRONT BOOK MODEL

UK bulk annuity sales were £1,977m, from 63 policies, (2014: £5,987m from 54 policies), including the UK's largest ever medically underwritten bulk annuity contract, covering £230m in pension liabilities.

Many UK DB pension plan trustees and sponsoring companies wish to mitigate or remove financial risk associated with their promises to pay pensions.  Our role is to apply our asset management, liability management, complex administration and deal structuring skills to help them achieve their desired outcome in the most effective way possible.  Increasingly this means choosing which risks we retain on our balance sheet and which risks are reinsured. This capital-lite model seeks to optimise return on capital and will mean more of the cash generation and profits being realised at the point of sale than has been the case previously, whilst risk retained in respect of this new business (asset and partial longevity) will continue to create future, albeit lower, sources of value for shareholders in the subsequent years of each new annuity contract. Over 2015 we widened our panel of reinsurers to 11 and reinsured £3.8bn of longevity risk spread across seven of these reinsurers.

The pipeline for UK PRT remains substantial and strong.  Some UK PRT deals were accelerated into December 2015 in advance of the implementation of Solvency II, and as a result we saw strong new business flows in December.  We remain disciplined in the deployment of our capital, with all transactions having to meet minimum capital hurdle rates, and continue to expect an uneven distribution of new business between reporting periods.  However the UK market potential is very large, the client need is strong, our skill sets highly relevant and sought after and our client reach well established.

credit and longevity management

Our £43.4bn back book of assets and liabilities is well-diversified and with prudent reserves of £2.2bn for adverse credit events and c.£1.7bn of prudence in excess of best estimate for longevity.  

The assets backing our annuity liabilities consist predominantly of globally diversified investment grade credit assets with an average 'A-' rating, making up £38bn out of the £43.4bn.  Just 2.4% of the £43.4bn is held in corporate bonds rated as sub-investment grade.  The focus of the portfolio is to provide secure and stable sterling cashflows to back pension payments.  Our in-house expert fixed income fund managers are incentivised to manage the portfolio against credit deterioration, particularly default losses and are pioneers in the institutional shift towards buy-and-maintain fixed income portfolios actively managed for credit risk.   

Direct Investments are managed in the same way, with directly negotiated covenants and security or collateral a primary feature of these self-manufactured asset portfolios.   This portfolio is now £5.5bn, (2014: £4.6bn). We hold a further £3.5bn in gilts (included as 'AA' rated assets).  Within the credit assets backing our annuity liabilities, our exposure to Oil & Gas is 5.2% with a further 1.2% in Basic Resources. Our allocation to Banks remains low at 4.4%.

Our gross longevity exposure including longevity insurance deals is £48.7bn with net exposure after longevity reinsurance of £37.1bn. With our prudent reserves, careful management of our net longevity risk and our well-diversified asset portfolio, combined with the ability to self-manufacture further direct investment, we are confident that our back book can deliver strong profits for many years into the future.

individual retirement solutions

Following the acquisition of Newlife Home Finance, now Legal & General Home Finance, lifetime mortgage advances were £201m (2014: £nil), with £99m of advances in Q4 2015. The equity release market grew 16% in 2015 to £1.6bn and is forecast to reach £2.3bn by 2019. The number of people over 60 years old is expected to grow by 6.3 million in the next 20 years, coupled with an estimated £1.4 trillion of housing equity currently owned by the over 65s in the UK, makes the long-term growth characteristics of this market very strong.

Individual Annuity sales were down 45% to £327m (2014: £591m), with £65m of sales in Q4 2015.  We expect this market to remain subdued.

LEGAL & GENERAL investment management

FINANCIAL HIGHLIGHTS £m			2015	20141
Total revenue			694	645
Total costs			(335)	(309)
Asset management operating profit			359	336
Workplace Savings			(4)	(15)
Operating profit			355	321
Net cash generation			281	246
Cost:income ratio2 (%)			48	48
External AUM net flows (£bn)			37.7	7.5
Internal AUM net flows (£bn)			(2.1)	0.9
Disposal of Legal & General France (LGF)			(2.3)	-
Total AUM net flows (£bn)			33.3	8.4
Of which international (£bn)			9.5	8.7

£bn			2015	2014
Assets under management, including overlay assets3			746.1	693.7
Advisory assets			10.5	14.8
Total assets			756.6	708.5
Of which:
- International assets under management, including overlay assets3			122.4	114.0
- International advisory assets			10.5	14.8
- Total international assets			132.9	128.8
Assets under administration - Workplace Savings			14.7	11.1
- of which, managed by LGIM			14.4	10.5

1.    LGIM includes the Workplace Savings business which was previously reported in Savings.

2.    Excluding Workplace Savings.

3.    Assets under management include overlay assets, which represent the notional value of derivative instruments on which LGIM earns fees. Fees are charged on notional values and as such are not subject to positive or negative market movements.

CONTINUED PROFIT AND CASH GROWTH FROM A diversified BUSINESS

LGIM has delivered strong results with operating profit up 11% to £355m (2014: £321m). LGIM is continuing to diversify its business by offering a broader range of solutions across client segments and markets, such as fiduciary management and Pathway Funds for DC schemes.

LGIM maintained a cost:income ratio, excluding Workplace, of 48% (2014: 48%), while continuing to invest in the business. Total revenues increased 8% to £694m (2014: £645m).

Total external AUM net flows increased fivefold to £37.7bn (2014: £7.5bn) driven by positive net flows across every client segment, region and product level.  The National Grid pension scheme mandate was successfully integrated in Q4, adding c.£12bn of fund flows. 

In Workplace Savings the business delivered a breakeven result in Q4 and the operating loss was reduced to £4m (2014: £15m) for the year.

market leading de-risking solutions

			Active						Workplace
Asset movements		Index	fixed	Solu-	Real	Active	Total	Advisory	Savings
£bn		funds	income	tions	assets	equities	AUM	assets	AUA
At 1 January 2015		274.8	102.9	293.3	14.5	8.2	693.7	14.8	11.1
External inflows		33.4	11.1	16.3	1.4	-	62.2		3.3
External outflows		(30.9)	(4.3)	(6.6)	(0.9)	-	(42.7)		(0.7)
Overlay / advisory net flows		-	-	18.2	-	-	18.2	(4.6)	-
External net flows	2.5		6.8	27.9	0.5	-	37.7	(4.6)	2.6
Internal net flows	(0.7)		(1.9)	-	0.9	(0.4)	(2.1)	-	-
Disposal of LGF	-		(2.3)	-	-	-	(2.3)	-	-
Total net flows	1.8		2.6	27.9	1.4	(0.4)	33.3	(4.6)	2.6
Cash management movements	-		0.8	-	-	-	0.8	-	-
Market and other movements	(2.3)		0.5	17.0	2.4	0.7	18.3	0.3	1.0
At 31 December 2015	274.3		106.8	338.2	18.3	8.5	746.1	10.5	14.7

Total AUM increased 8% to £746.1bn (2014: £693.7bn), while total external net inflows were £37.7bn (2014: £7.5bn).  The sale of our French insurance business (LGF) in Q4 2015 resulted in a net outflow of £2.3bn.  

LGIM remains the market leader in pension risk-management solutions in the UK, with over 40% of the Liability Driven Investment (LDI) market. Assets in LDI and Multi-Asset solutions increased 15% to £338.2bn (2014: £293.3bn), including external net flows of £27.9bn (2014: £20.7bn). LGIM has, and continues to develop, client solutions, including our fiduciary management capability for the institutional market, and expanding our Multi-Asset range.

Index external net flows significantly improved on last year to £2.5bn (2014: £15.8bn outflow). This was primarily due to an increase in alternatively weighted index products and strong international net flows of £5.1bn (2014: £2.0bn), with significant mandate wins in Europe, Asia and the US. The index market is experiencing on-going fee pressure but our size and scalable model are providing mitigation to this trend.

Active Fixed Income external inflows of £6.8bn (2014: £1.7bn) were driven by continued strong demand for LGIM's credit capabilities in the US and growing demand for our global fixed income products.

The Retail business delivered a record year with external net flows of £1.2bn (2014: £0.8bn) and was sixth in UK net sales in 2015 (The Pridham report).  AUM increased to £19.9bn (2014: £18.1bn).  Strong fund flows were experienced in Index, Multi-Asset and Property funds.    

Real assets achieved total net inflows of £1.4bn (2014: £2.4bn) reflecting strong asset value growth and our clients' continued appetite for this asset class. LGIM worked in partnership with LGC to transact on three significant UK urban regeneration schemes:  MediaCity UK in Salford; Thorpe Park in Leeds and Central Square in Cardiff.  We continued to build on our international client base, securing investment in UK real estate from institutions in Japan, Kuwait, Saudi Arabia, Bahrain, the Netherlands, Finland, Switzerland and Canada. We transacted £0.7bn of commercial lending deals in 2015 (2014: £0.6bn).

The outflow in advisory assets of £4.6bn primarily reflects Wells Fargo's decision to remove GIA advisory assets from their collective investment trust. The original acquisition of GIA allowed for this outcome.

GROWTH IN UK DEFINED CONTRIBUTION

In a market of increasing importance following recent pension reforms, net inflows into LGIM's Defined Contribution (DC) business were £2.9bn (2014: £2.7bn).  LGIM has continued to develop its comprehensive range of products available to DC customers with the launch of its Pathway Funds, and it now has over £3.8bn on the investment only platform.  The win of several significant mandates in 2015, including a number of large high street retailers, took total customers to 1.8m.  These mandates have been integrated successfully through the automated bulk transfer on-boarding of the schemes.  Total DC assets have increased by 13% to £46.1bn (2014: £40.7bn).

CONTINUED INTERNATIONAL EXPANSION

International AUM net flows were £9.5bn (2014: £8.7bn). As a result total international AUM increased 7% to £122.4bn (2014: £114.0bn). This was primarily driven by growth in the US of £6.3bn (2014 £6.0bn). LGIM won its first multi-billion dollar US Index mandate in 2015 and continued to attract significant LDI and Active Fixed Income inflows.  In Asia, we won new mandates in Korea, Taiwan, and Japan.  We also signed a co-operation agreement with Meiji Yasuda, the third largest insurance company in Japan.  Total net flows in Asia were £0.8bn (2014: £0.7bn). 

LEGAL & GENERAL CAPITAL

FINANCIAL HIGHLIGHTS £m			2015	2014
Operational cash generation			187	162
Traded portfolio			164	151
Direct investment portfolio			69	52
Total operating profit			233	203

DIRECT INVESTMENT PORTFOLIO £m			2015	2014
Housing			345	297
Urban regeneration			346	304
Clean energy			15	-
Alternative finance			161	99
			867	700
TRADED PORTFOLIO £m
Equities			1,389	1,313
Fixed income			143	483
Multi-asset			133	277
Cash			1,548	1,631
			3,213	3,704
LGC investment portfolio			4,080	4,404
Treasury assets at holding company £m			1,585	718
TOTAL			5,665	5,122

growing profits

Legal & General Capital (LGC), excluding returns on treasury assets, increased operating profit by 14% to £223m (2014: £196m) with an assumed annualised return of 5.3% (2014: 5.0%) on an average asset base of £4.2bn (2014: £3.9bn).

increasing strategic direct investmentS

LGC has successfully continued with its strategy of investing into businesses that require long term capital, thereby creating assets that can be invested in by the Group's investment and retirement businesses. As a result LGC's £0.9bn of strategic direct investments have multiple drivers of value for the Group. These include providing assets with high returns for the shareholder funds, creating new LGIM client products and fee earning opportunities, and delivering assets suitable to back annuity new business. The multi-billion pound funding gap in the core sectors in which LGC selectively invests - housing, urban regeneration, alternative finance and clean energy - continue to provide significant opportunities for the medium term future.  LGC's £0.9bn of direct investments, together with LGR's £5.5bn and LGA's £0.6bn, total to £7.0bn at the end of 2015. 

Housing expanded into Build to Rent

During the second half of 2015, LGC partnered with PGGM, one of the largest Dutch pension managers, to form a £600m partnership to develop purpose-built private rental housing across the UK. PGGM already has such investments in the US and the Netherlands and this partnership will expand its reach into the UK sector. The partnership has been seeded with LGC's regeneration sites in Walthamstow, Bristol and Salford. LGC expect to play a significant role in this sector to form a new institutional asset class and are seeing a strong pipeline of opportunities. Additional investors will be introduced to the fund generating further fees for LGIM, as our Build to Rent portfolio grows in 2016 and beyond.

In the general housing sector, CALA Homes performed very well during the period and had a record year in terms of both revenue and profit in their financial year to 30 June 2015. This represented the first year of significant volume increase as part of CALA's strategic growth plans. Revenue growth was up 79% to £512m driven by an increase in both home completions and the highest ever average selling price. This resulted in operating profit more than doubling to £73m (2014: £35m).

LGC also launched a modular housing business, Legal & General Homes, which will seek to modernise the home building industry by providing modern, precision engineered factory manufactured houses through its new factory just outside Leeds.

Further Urban Regeneration partnerships

Following the investment into the world class media hub, MediaCityUK, in the first half of 2015, LGC invested in two new significant Urban Regeneration sites: in Cardiff and Leeds.

Cardiff Central Square is a £400m development in the centre of Cardiff. BBC Wales announced that it would be moving its HQ to the site and construction has started following the signing of its lease. LGC has formed a joint venture partnership with Rightacres and Cardiff City Council with the aim of developing the Central Square area, with the BBC Wales providing an anchor tenant and catalyst to the development. LGC expects to complete on the first site (One Central Square) in March 2016, which is now over 95% pre-let. In addition, LGR has agreed terms to acquire 3 Central Square, intended to be the new Headquarters for BBC Wales.

In Leeds, LGC's £162m investment in Thorpe Park will finance and build a multi-use commercial business park, incorporating retail, leisure and land. Construction will commence as letting agreements are finalised. This investment has generated another strategic partner for LGC: Scarborough Ltd, who own 50% of the land with LGC and will act as a development partner.

These further developments take LGC's Urban Regeneration sites to a potential Gross Development Value (GDV) of approximately £3bn. LGC are partnering with the UK Government's Regeneration Investment Organisation (RIO) to source further projects and attract foreign investment into the UK as co-investors.

Alternative Finance launched

LGC has a 40% stake in Pemberton Asset Management, an independent alternative asset management group providing loan finance to the European mid-market sector. Pemberton's first fund, European Mid-Market Debt Strategy, started lending in July 2015 and is on target to hold a final close of the Fund in July 2016.  As at 31 December 2015, it was 70% invested and had raised €492m. The strategy is to capitalise on the significant opportunities presented by the large funding gap in Europe as a result of regulatory constraints on the banking sector. The fund is looking to build a diversified portfolio of directly originated private loans to market leading companies with turnover between €75m and €1bn.  Pemberton was awarded Global Newcomer of Year 2015 by Private Debt Investor.

Clean Energy Strategy

The UK will require significant deployment of private long term capital in clean energy power generation to reach international 2020 and longer term emission standards.  This will be delivered by both existing technologies that are already at scale in the UK, and newer clean energy technologies that should be developed to take advantage of the UK's natural resources.

At the end of 2015 L&G Capital made an investment in NTR PLC, a company whose key aim is to secure a greener future with current focus on constructing and operating on-shore wind in the UK and Republic of Ireland. LGC committed up to 47.5% of a fund targeting €250m to invest in creating a portfolio of long term on-shore assets managed by NTR.

INSURANCE

FINANCIAL HIGHLIGHTS £m			2015	2014
Operational cash generation			323	332
New business surplus / (strain)			25	(5)
Net cash generation			348	327
Change to reinsurance modelling			(93)	-
Other experience variances, assumption changes, tax and non-cash movements			38	43
Operating profit			293	370
UK Protection new business annual premiums			231	230
Retail Protection gross premiums			1,112	1,056
Group Protection gross premiums			330	351
General Insurance gross premiums			337	377
Total UK gross premiums			1,779	1,784

continued growth in net cash

Operational cash reduced marginally to £323m (2014: £332m). New business surplus of £25m (2014: strain of £5m) resulted from the strong commercial focus of our market leading retail protection business and disciplined expense management across the division, while continuing to deliver value to both customer and shareholder. UK Protection margin increased to 9.9% (2014: 8.4%) in the period.

sustained premium income

UK Protection gross premiums up 2% to £1,442m (2014: £1,407m) driven by continued strong new business sales and coupled with improved customer retention.

Retail Protection gross premium income increased 5% to £1,112m (2014: £1,056m) with new business annual premium of £162m (2014: £165m). We remain the largest provider of retail protection in the UK and benefit from a highly efficient automated underwriting model and broad distribution reach. Our direct distribution channel delivered retail protection new business APE of £29m, representing 12% growth on 2014 and now accounts for 18% of new business APE (2014: £26m, 16% of new business APE).

Group Protection gross premium was £330m (2014: £351m) with new business of £69m (2014: £65m).

Legal & General Mortgage Club facilitated £46 billion of mortgages in 2015 (2014: £40bn) through strong partnerships with top lenders and over 8,000 mortgage brokers. As the largest participant in the intermediated mortgage market in the UK, we are now involved in one in five of all UK mortgage transactions. In addition our surveying business completed c.465k surveys, representing an increase of 96% over 2014.

General Insurance operating profit reduced to £51m (2014: £59m) with a combined operating ratio of 89% (2014: 87%), including a £15m impact of the three major UK weather events in December 2015 (2014: £12m adverse weather at the start of the 2014).

reserving impact reduces PROFITS

The reinsurance modelling for our UK Protection business has been enhanced. Recent reinsurance contracts have been written on a risk premium basis (as opposed to level premium) and the model change ensures that for these treaties, sufficient prudence is being held in later years. The one-off impact reduced operating profit after tax by £93m in 2015. This also defers a higher proportion of cash generation into the later years of these reinsurance contracts.

savings

FINANCIAL HIGHLIGHTS £m			2015	2014
Operational cash generation			119	127
New business strain			(9)	(14)
Net cash generation			110	113
Experience variances, assumption changes, tax and non-cash movements			(11)	(8)
Operating profit			99	105

Operational cash generation reduced to £119m (2014: £127m) as we continue to manage the reducing contribution from our mature savings business.  Net cash generation was broadly flat at £110m (2014: £113m) as we reduce the cost base associated with this business.

Savings operating profit reduced to £99m (2014: £105m) resulting from marginally lower contributions from our with-profits and retail bonds businesses as we manage the gradual run-off of these mature product lines.

On the 15 January 2016 the Group announced the sale of Suffolk Life to Curtis Banks Group for £45m. This disposal is expected to complete in the first half of 2016. In 2015 Suffolk Life contributed £nil to operational cash, net cash and operating profit.

				Total
	Platforms	Mature Retail Savings	Consol  Adj	Savings excluding Suffolk Life	Suffolk Life
Assets under administration	£bn	£bn	£bn	£bn	£bn
At 1 January 2015	71.9	36.0	(5.6)	102.3	7.7
Gross inflows	8.7	1.1	-	9.8	1.2
Gross outflows	(5.2)	(4.1)	0.6	(8.7)	(0.5)
Disposal of Legal & General International (Ireland) Limited	-	(2.8)	-	(2.8)	-
Net flows	3.5	(5.8)	0.6	(1.7)	0.7
Market and other movements	1.5	(0.6)	-	0.9	0.2
At 31 December 2015	76.9	29.6	(5.0)	101.5	8.6

Our Platforms business delivered net flows of £3.5bn (2014: £5.4bn) resulting in assets under administration (AUA) increasing 7% to £76.9bn (2014: £71.9bn). Cofunds continues to lead the market, with a 19% share of UK platform assets. Cofunds delivered the £11m per annum reduction in costs by the end of 2015, targeted at the time of the acquisition.

In Mature Savings, assets were £29.6bn (2014: £36.0bn). Following the closure of our With-profits fund to new business in January 2015, net outflows of £(3.0)bn (2014: £(3.4)bn), excluding the disposal of Legal & General International  (Ireland), were in line with our expectations.

freedom and choice

Since the introduction of the Pensions Reform legislation we have seen an increase in the proportion of customers wishing to take their pension pots as cash withdrawals, with approximately 90%, or 22,000 customers, electing to take cash payments. Our average payment size is £12k. This compares to approximately 60% of customers taking cash before the reform legislation was announced.

LEGAL & GENERAL AMERICA

FINANCIAL HIGHLIGHTS $m			2015	2014
Operational cash generation			83	76
Operating profit			125	93
Gross premium income			1,183	1,117
New business sales			106	150

INCREASED CONTRIBUTION TO CASH and profits

Operational cash generation increased by 9% to $83m (2014: $76m). This represents the dividends paid by Legal & General America (LGA) to the Group and reflects the focus of LGA to deliver net cash generation.

Operating profit increased by 34% to $125m (2014: $93m) with 2014 operating profit impacted by total mortality claims $46m higher than assumption. In 2015, mortality claims were $21m higher than assumption.

Gross premium revenue increased 6% to $1,183m (2014: $1,117m) and continues to benefit from strong relationships with the brokerage general agents, (BGAs), who distribute term assurance in the US market. LGA is the 6th largest provider of term life assurance, by annual premium equivalent, in the US and remains the 2nd largest provider through the key distribution channel of BGAs. LGA now has 1.21m policies (2014: 1.15m).

pricing for emerging us MORTALITY trends

LGA adjusted its new business pricing in 2014 and made further adjustments in 2015. These changes allow for the pricing of risk at a more granular level. As a consequence prices have been raised at lower margin price points and reduced elsewhere. This has resulted in lower new business volumes of $106m (2014: $150m), broadly in line with our expectations, with a significant improvement in new business margins to 12.1% (2014: 9.9%). In 2016 we expect to maintain margins on new business consistent with 2015.

Facilitating US Pension risk transfer Business

LGA is important to the expansion of the Group in the US and will continue to provide the regulatory balance sheet, administrative services and payments to annuitants for LGR America and back office support for LGIM America.

Group investment variance

The Group investment variance in 2015 was £(57)m. This was mainly driven by the traded equity portfolio within LGC, which produced a negative investment variance of £110m, as a result of equity markets performing below longer term expected outcomes, partially offset by benign default experience in LGR.

NET CASH GENERATION BACKED BY DIVIDENDS TO GROUP

In 2015, 80% of the net cash generation was distributed to the Group (2014: 86%).

				2015			2014
			Net	Dividend	Dividend	Net	Dividend	Dividend
£m			Cash	to Group	% of cash	Cash	to Group	% of cash
LGR, Insurance, Savings and LGC			1,062	739	70	929	685	74
LGIM			281	210	74	262	213	81
LGA			54	54	100	46	46	100
Sub-total			1,397	1,003	72	1,237	944	76
Group debt and other costs			(141)	-	-	(133)
Total			1,256	1,003	80	1,104	944	86
External dividend			797			668
Dividend coverage			1.58			1.65

OPERATIONAL CASH GENERATION GUIDANCE

			2015	2016
£m				Guidance
LGR			372
Insurance excluding General Insurance			282
Savings			119
LGA1			54
LGC			187
Sub-total			1,014	+ 6-7%
LGIM			303
General Insurance			41
Operational cash generation from divisions			1,358
Group debt costs			(122)
Other costs			(19)
Total operational cash generation			1,217

1.    LGA has already paid its 2016 ordinary dividend of $88m in February 2016.

taxation - effective tax rate of 19.3%

Equity holders' Effective Tax Rate (%)			2015	2014
Total Effective Tax Rate			19.3	19.9
Annualised rate of UK corporation tax			20.25	21.5

In 2015, the Group's effective tax rate remained slightly below the UK corporation tax rate due to a number of differences between the measurement of accounting profit and taxable profits.

The UK has a deferred tax asset of £6m in respect of trading losses carried forward in Group companies (2014: £45m) relating mainly to Cofunds.  Trading losses within Legal & General Pensions Limited, which benefit both LGR and Insurance, were fully utilised in 2015.  The contribution to net cash generation in LGR and Insurance from the utilisation of tax was £31m for 2015 (2014: £73m). 

focus on efficiency and core activities

We continue to rationalise our business model to focus on core activities where we believe we can achieve significant scale and attractive returns on capital. During 2015 we disposed of Legal & General International (Ireland) for £15m (carrying value: £14m), our Egyptian business for £33m (carrying value: £14m), Legal & General France for a loss of £43m compared to the carrying value and Legal & General Gulf for £1 (carrying value: £2m). As a result of these transactions we have reflected a £25m net loss within investment and other variances representing the difference between previous carrying values and sale proceeds.

On 14th January 2016 we agreed to sell Suffolk Life to Curtis Bank for £45m, subject to regulatory approval, and as a consequence it has been classified as held for sale in our 2015 results.

Effective and sustainable management of costs remain key to our strategy. We exceeded our £80m cost saving target in 2015, incurring £50m of one-off costs in doing so. In 2016 we plan to invest £40m to deliver a further reduction in management expenses and operating costs in both nominal and real terms.

borrowings

Legal & General continues to have a strong liquidity position reflecting its requirements for working capital and derivative collateral.  The Group's outstanding core borrowings total £3.1bn (2014: £3.0bn). There is also a further £0.5bn (2014: £0.7bn) of operational borrowings including £0.6bn (2014: £0.7bn) of non-recourse borrowings. In June 2015 we redeemed €600m of 4.0% Euro dated subordinated notes at par. In October 2015 we issued £600m of 5.375% Sterling Subordinated notes.

Group debt costs of £153m (2014: £142m) reflect an average cost of debt of 5.3% per annum (2014: 5.2% per annum) on average nominal value of debt balances of £2.9bn (2014: £2.7bn).

SOLVENCY II

As at 31 December 2015 the Group had a proforma Solvency II surplus of £5.5bn over its Solvency capital requirement, corresponding to a Solvency II coverage ratio of 169%. The Group has set a preferred Solvency II coverage ratio of greater than 140%.

Capital (£bn) 1				2015
Eligible own funds				13.5
Solvency capital requirement (SCR)				(8.0)
Surplus				5.5
SCR Coverage ratio (%)				169

1.    Solvency II position on a proforma basis as at 31 December 2015 and before the accrual of the final dividend.

sensitivity analysis

	Impact on net of tax capital surplus £bn	Impact in SII coverage ratio %
Credit spreads widen by 100bps using the same 100bps addition to all ratings	(0.3)	(1)
Credit spreads widen by 100bps assuming an escalating addition to ratings	(0.6)	(8)
Credit spreads tighten by 100bps using the same 100bps deduction to all ratings	0.2	1
Credit spreads tighten by 100bps assuming an escalating deduction to ratings	0.6	7
A worsening in our expectation of future default and downgrade to 115% of our assumed best estimate level	(0.5)	(11)
20% fall in equity markets	(0.4)	(4)
40% fall in equity markets	(0.7)	(8)
20% rise in equity markets	0.5	5
15% fall in property markets	(0.3)	(3)
100bps increase in risk free rates	0.6	19
100bps fall in risk free rates	(0.4)	(11)
1% reduction in annuitant base mortality	(0.1)	(2)
1% increase in annuitant base mortality	0.1	2

These are all independent stresses to a single risk.  In practice the balance sheet is impacted by combinations of stresses and the combined impact can be larger than adding together the impacts of the same stresses in isolation.  It is expected that, particularly for market risks, adverse stresses will happen together.  The above sensitivity analysis does not reflect all management actions which could be taken to reduce the impacts. Transitional relief on technical provisions is assumed to be recalculated in the interest rate sensitivities.

IGD Capital resources

As at 31 December 2015 the Insurance Group's Directive (IGD) surplus was £4.4bn (2014: £3.9bn).

The Group's capital resources totalled £8.2bn, covering the capital resources requirement of £3.8bn by 2.17 times.

The Group maintains a provision of £2.2bn (2014: £2.3bn) to provide for the risk of credit default in our annuity fund. Over the last five years we have experienced total actual defaults of less than £10m. However, we have incurred losses over these years, including 2015, (accounted for through investment variance) where we have traded out of names where we are no longer comfortable with the credit position.

Capital (£bn)			2015	2014
Group capital resources			8.2	7.7
Group capital resources requirements			(3.8)	(3.8)
IGD surplus			4.4	3.9
Coverage ratio (%)			217	201

economic capital

Economic capital is the amount of capital that the Board believes the Group needs to hold, over and above its liabilities, in order to meet the Group's strategic objectives. Our Economic Capital model has not been reviewed by the Prudential Regulatory Authority (PRA), nor will it be.

As at 31 December 2015 Legal & General Group had an economic capital surplus of £7.6bn (2014: £7.0bn), corresponding to an economic capital coverage ratio of 230% (2014: 229%).

Eligible own funds increased by £1.0bn to £13.5bn (2014: £12.5bn). The economic capital requirement increased to £5.9bn (2014: £5.5bn).

Capital (£bn)			2015	2014
Eligible own funds			13.5	12.5
Economic capital requirement			(5.9)	(5.5)
Economic capital surplus			7.6	7.0
Coverage ratio (%)			230	229

Analysis of movement from 1 January  to 31 December 2015 (£bn)				Economic Capital surplus
Economic solvency position as at 1 January 2015				7.0
Operating experience				0.7
New business surplus				0.1
Non-operating experience				0.4
New Sterling subordinated debt issuance				0.6
Repayment of Euro subordinated debt				(0.5)
Dividends paid in the period				(0.7)
Economic solvency position as at 31 December 2015				7.6

supplementary eev disclosure

EEV highlights (Pence)			2015	2014
Equity per share including LGIM			221	212
Equity per share			195	185

Analysis of EEV results (£m)			2015	2014
Contribution from new business			529	850
Intra-group transfer of annuities from With-Profit to Non-Profit Fund			-	100
Expected return from in-force business			474	490
Experience variances and assumption changes			(31)	(185)
Development costs			(25)	(32)
Contribution from shareholder net worth			202	194
EEV operating profit on covered business			1,149	1,417
Business reported on an IFRS basis			161	164
EEV operating profit			1,310	1,581
Economic  and other variances			140	790
Gains attributable to non-controlling interests			19	7
EEV profit before tax			1,469	2,378
Tax on profit and other tax impacts			(133)	(362)
EEV profit after tax			1,336	2,016

This is the last time that the Group will be providing supplementary EEV disclosure. The Group instead will focus on providing economic and regulatory capital disclosures from H1 2016.

principal risks and UNCERTAINTIES

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

RISKS AND UNCERTAINTIES	TREND, OUTLOOK AND MITIGATION
Reserves for long-term business may  require revision as a result of changes in experience, regulation or legislation. The writing of long-term insurance business requires the setting of assumptions for long-term trends in factors such as mortality,  lapse rates and persistency, valuation interest rates, expenses and credit defaults.  Actual experience may result in the need  to recalibrate these assumptions reducing profitability. Forced changes in reserves  can also be required because of regulatory  or legislative intervention in the way that products are priced, reducing profitability  and future earnings.	We regularly appraise the assumptions underpinning the business that we write. In our annuities business we are, however, exposed to factors such as dramatic advances in medical science beyond those anticipated leading to unexpected changes in life expectancy. In protection business we remain inherently exposed to rates of mortality diverging from assumptions and to loss from events that cause widespread mortality/morbidity or significant policy lapse rates. There is also potential for legislative intervention in the pricing of insurance products irrespective of risk factors, such  as age or health. We undertake significant analysis of longevity and mortality risks to ensure an appropriate premium is charged for the risks we take  on and that our reserves remain appropriate.  We remain focused on developing a comprehensive understanding of annuitant mortality and we continue to evolve and develop our underwriting capabilities.  Our risk based capital model also takes account of unanticipated rates of mortality improvements in determining our prudential capital requirement.
Investment market performance or conditions in the broader economy  may adversely impact our earnings and profitability. The performance and liquidity of investment markets, interest rate movements and inflation impact the value of investments we hold in shareholders' funds and those to meet the obligations from insurance business, with the movement in certain investments directly impacting profitability. Interest rate movement and inflation can also change the value of our obligations. We use a range of techniques to manage mismatches between assets and liabilities. However, loss can still arise from adverse markets. In addition, significant falls in investment values can reduce fee income to our investment management business, while broader economic conditions can impact the purchase and the retention of retail financial services products, impacting profitability.	Ongoing uncertainty in the global economic outlook is expected to cause continued volatility in financial markets as they respond to falling growth rates in emerging economies and speculation to future monetary policies, with potential for more disruptive asset price shifts should markets reappraise the degree to which a further deterioration in the outlook has been priced into asset values. Current illiquidity in bond markets could exaggerate the impacts of a significant market correction further depressing asset prices. Whilst the international impact of a euro default has diminished, there also remains potential for renewed financial stress in Europe driven by political uncertainty, as well as from geo-political events. The referendum on UK membership of the European Union also has potential to increase financial market volatility as markets speculate on the impact of potential outcomes. We model our business plans across a broad range of economic scenarios and take account of alternative economic outlooks within our overall business strategy. Our ORSA process plays an integral part in our business planning ensuring a clear link between capital sufficiency and the nature of risks to which we may be exposed. We have sought to ensure focus upon those market segments that we expect to be resilient in projected conditions. For example investing our long-term funds into real assets provides both enhanced returns to our 'slow money' and reduces exposure to the volatilities of short-term financial markets.

In dealing with issuers of debt and other types of counterparty the group is exposed to the risk of financial loss. A systemic default event within the corporate sector, or a major sovereign debt event, could result in dislocation of bond markets, significantly widening credit spreads with consequential impacts on the value of our bond portfolios, and may result in default of even strongly rated issuers of debt, exposing us to financial loss. We are also exposed to banking, money market and reinsurance counterparties, and settlement, custody and other bespoke business services, a failure of which could expose us to both financial loss and operational disruption of our business processes.	The current economic outlook inherently increases the risk of default by some issuers of bonds, and recent months have seen a widening of credit spreads, with high yield markets showing particular signs of stress. There remain, however, a range of factors that could lead to more widespread stress in bond markets as a whole resulting in reduced profitability or financial loss to the Group. Such factors include a significant deterioration in global economic conditions or a banking crisis. An economic shock or significant change in the current economic outlook may also increase potential for a supplier of business services being unable to meet their obligations to us. We actively manage our exposure to default risks, setting counterparty selection criteria and exposure limits, and using the capabilities of LGIM's credit management team to ensure risks in our bond portfolio are effectively controlled, and if appropriate traded out. Alongside holding reserves for our assessment of default, we continue to diversify the asset classes backing our annuities business, investing in real assets and property lending investments. While our capital-lite strategy for bulk annuities will increase our counterparty risk exposure, we continue to be selective in the counterparties with which we will deal.
A material failure in our business processes may result in unanticipated financial loss or reputation damage. We have constructed our framework of internal controls to minimise the risk of unanticipated financial loss or damage to our reputation. However, no system of internal control can completely eliminate the risk of error, financial loss, fraudulent actions or reputational damage.	Our plans for growth together with the regulatory change agenda inherently will increase the profile of operational risks across our businesses. We continue to invest in our system capabilities and business processes to ensure that we meet the expectations of our customers; comply with regulatory, legal and financial reporting requirements; and mitigate the risks of loss or reputational damage from operational risk events. Our risk governance model seeks to ensure that business management are actively engaged in maintaining an appropriate control environment, supported by risk functions led by the group chief risk officer, with independent assurance from Group Internal Audit.
Changes in regulation or legislation may have a detrimental effect on our strategy. Legislation and government fiscal policy influence our product design, the period of retention of products and our required reserves for future liabilities. Regulation defines the overall framework for the design, marketing, taxation and distribution of our products; and the prudential capital that we hold. Significant changes in legislation or regulation may increase our cost base, reduce our future revenues and impact profitability or require us to hold more capital. The prominence of the risk increases where change is implemented without prior engagement with the sector. The nature of long-term business can also result in some changes in regulation, and the re-interpretation of regulation over time, having a retrospective effect on our in-force books of business, impacting the value of embedded future profits.	Although the Solvency II regime came into operation on 1 January 2016, there continues to be a significant pipeline of other regulatory change. EU driven regulation includes UCITS V, MiFID II and PRIIPs, as well as various new tax rules. Within the US a new statutory reserving regime, Principle Based Reserves (PBR), will come into operation in January 2017. In the UK alongside the PRA ensuring the effective operation of the Solvency II regime and an ongoing requirement upon Legal & General to ensure compliance with the new regulatory framework, the FCA continues to develop its approach to consumer regulation, and there remain challenges in ensuring that regulatory interpretation of rules is proportionate and cost effective for the insurance sector, and aligns with the industry as businesses become increasingly digitalised. The FCA programme of thematic reviews of industry practices may also lead to additional business remediation costs. More broadly we continue to see legislative and regulatory change particularly in relation to the UK pensions market, and in the applicable tax framework including as a result of devolution and implementation of the OECD BEPS recommendations. We are supportive of regulation in the markets where we operate where it ensures trust and confidence and can be a positive force on business. We remain, however, vigilant to the risk that future legislative and regulatory change may have unintended consequences for the sectors in which we operate. We seek to actively participate with government and regulatory bodies in the UK and Europe to assist in the evaluation of change so as to develop outcomes that meet the needs of all stakeholders, and have actively participated in the Financial Advice Market Review, the Capital Markets Review and various tax consultations. Internally, we evaluate the impact of all legislative and regulatory change as part of our formal risk identification and assessment processes, with material matters being considered at the Group Risk Committee and the Group Board. Our internal control framework includes processes that seek to ensure ongoing compliance with relevant legislation and regulation. We cannot, however, completely eliminate the risks that controls processes may fail or that historic accepted practices may be reappraised by regulators.
New entrants may disrupt the landscape of the markets in which we operate As has been seen other business sectors, it is possible that alternative digitally-enabled providers of financial service products emerge with lower cost business models or innovative service propositions and capital structures disrupting the current competitive landscape.	Customer facing businesses are becoming increasingly digitalised. Huge structural changes have already changed the face of travel, music, retail and media industries. There is already strong competition in all our markets, and although we have had considerable past success at building sufficient scale to offer low cost products it is possible that alternative providers emerge with lower cost or new service models that present new challenges for our businesses. We are executing a strategy that has digital at its heart, using digital platforms that allow for globalisation and high scale. We have already delivered online facilities for auto-enrolment, investment platforms and individual retirement products and continue to focus on ensuring that customer engagement is at the heart of the digital experience. We've a clear strategy, with the diversity and scale to expand organically in our selected markets.
The financial services sector is increasingly becoming a target of 'cyber crime'. As we and our business partners increasingly digitalise our businesses, we are inherently exposed to the risk that third parties may seek to disrupt our online business operations, steal customer data or perpetrate acts of fraud using digital media. A significant cyber event could result in reputation damage and financial loss.	The financial services sector continues to  see attempts by third parties to seek and exploit perceived vulnerabilities in IT systems. Potential threats include denial of service attacks, network intrusions to steal data for the furtherance of financial crime, and the electronic diversion of funds. We're focused on maintaining a robust and secure IT environment. Working with our business partners, we seek to ensure the security of our systems with proactive responses to emerging threats, however, the evolving nature of cyber threats means that residual risks will remain. During 2015 the Group Board received an update  on cyber risks and our control framework.

ENQUIRIES

Investors:

Laura Doyle                   Head of Investor Relations                                                                       020 3124 2088

Stephen Thomas            Investor Relations Manager                                                                     020 3124 2047

Media:

John Godfrey                 Corporate Affairs Director                                                                        020 3124 2090

Richard King                  Head of Group Corporate Communications                                               020 3124 2095
Michelle Clarke              Tulchan Communications                                                                        020 7353 4200

Notes

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

A presentation to analysts and fund managers will take place at 9.30am UK time today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of the presentation which can be accessed

at  http://www.legalandgeneralgroup.com/investors/results2016.html 

A replay will be available on this website later today.

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

PARTICIPANT DIAL-IN NUMBERS
LOCATION YOU ARE DIALLING IN FROM	NUMBER YOU SHOULD DIAL
UNITED KINGDOM	020 3059 8125
UNITED STATES (TOLL FREE)	1 855 287 8125
ALL OTHER LOCATIONS	[phone]

2016 Financial Calendar				Date
Ex-dividend date			28 April 2016
Record date			29 April 2016
Annual general meeting			26 May 2016
Payment date of 2015 final dividend			9 June 2016
Half-year results 2016			9 August 2016

DEFINITIONS

Operational cash generation is the expected release from in-force business for the UK non-profit Insurance and Savings and LGR businesses, the shareholder's share of bonuses on with-profits business, the post-tax operating profit on other UK businesses, including the medium term expected investment return on LGC invested assets, and dividends remitted from LGA, LGF and LGN.

Net cash generation is defined as operational cash generation plus new business surplus.

Operating profit measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items. Operating profit therefore reflects longer-term economic assumptions for the Group's insurance businesses and shareholder funds, except for LGA which excludes unrealised investment returns to align with the liability measurement under US GAAP. Variances between actual and smoothed economic assumptions are reported below operating profit. Exceptional income and expenses which arise outside the normal course of business in the year, such as merger and acquisition, start-up and closure costs, are excluded from operating profit.

Adjusted earnings per share is calculated by dividing profit after tax from continuing operations, attributable to equity holders of the Company, excluding recognised gains and losses associated with held for sale and completed business disposals, by the weighted average number of ordinary shares in issue during the period, excluding employee scheme treasury shares.

Annualised return on equity is calculated by taking annualised profit after tax attributable to equity holders of the Company, excluding gains and losses associated with held for sale and completed business disposals, as a percentage of the average shareholders' capital employed, being an average of the opening and closing shareholders' equity during the period.

FORWARD LOOKING STATEMENTS

This announcement may contain certain forward-looking statements relating to Legal & General, 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'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 announcement or any other forward-looking statement it may make.

 

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