L&G Full Year Results 2016 Part 1

RNS Number : 7988Y

Legal & General Group Plc

08 March 2017

 

Stock Exchange Release                                                                                                                

08 March 2017                                                                                                    

EPS¹ UP 19% to 22.2p, Profit Before Tax² up 17% to £1.6bn

financial highlights³: 

·      Net release from operations (net cash)⁴ up 12% to £1,411m (2015: £1,256m)

·      adjusted OPERATING PROFIT⁵ up 11% to £1,628M (2015: £1,463m)

·      Profit after tax UP 16% to £1,265m (2015: £1,094m)

·      Earnings per share up 17% to 21.22P (2015: 18.16p)

·      adjusted Earnings per share¹ UP 19% to 22.20P (2015: 18.58p)

·      Full year dividend up 7% to 14.35p per share (2015: 13.40p)

·      Adjusted return on equity⁶ 19.6% (2015: 17.7%)

·      SOLVENCY II SURPLUS OF £5.7BN (2015: £5.5BN)

·      SOLVENCY II COVERAGE RATIO OF 171% (2015: 176%), shareholder BASIS⁷

business highlights: 

·      lgr new business of £8.5bn (2015: £2.9bn)

·      lgr ANNUITY ASSETS UP 25% AT £54.4BN (2015: £43.4BN)

·      GROUP-WIDE DIRECT INVESTMENT UP 39% AT £10.0BN (2015: £7.2bn)

·      LGIM AUM UP 20% AT £894.2BN (2015: £746.1BN)

Nigel Wilson, Group Chief Executive, said:

"Our long term approach to strategy and investment coupled with outstanding execution has again delivered terrific financial performance in 2016. Profit before tax up 17% to £1.6 billion, net release from operations up 12% to £1.4 billion, EPS up 19% at 22.2p and a return on equity of nearly 20%.

We believe the UK remains a great place for us to help fill the huge funding gaps and under-provision of key financial products. We are playing our part to regenerate the UK's cities, delivering economic growth and jobs, capitalise on its world-leading universities and improve commercialisation of its scientific discoveries. Additionally, we are accelerating the evolution of our US businesses.

We look forward to the future with confidence as our core markets are growing, our market share is increasing, our balance sheet is strong and we have positive cash and earnings momentum. Through a combination of selective hiring and internal promotions we have significantly strengthened our management team and technology capability".

Sir John Kingman, Chairman, said:

"Legal & General has a strong management team and formidable further potential. Against that backdrop, the Board has considered the best trajectory of dividend growth, taking into account sustainability across a wide range of economic scenarios and the Group's anticipated financial performance. Accordingly, the Board has recommended an increase in the full year 2016 dividend of 7%".

1.    Adjusted earnings per share is calculated by dividing profit after tax attributable to equity holders of the Company, by the weighted average number of ordinary shares in issue during the period. This excludes a £60m net loss on disposals being a £64m impairment loss in relation to the disposal of Cofunds and a £4m profit in relation to the disposal of Suffolk Life (2015: £25m net loss in relation to the disposals of Legal & General France, Legal & General Gulf, Legal & General Egypt and Legal & General International (Ireland)).

2.    Represents profit before tax attributable to equity holders.

3.    The metrics within the Group's financial highlights are defined in the glossary, which includes Alternative Performance Measures, on pages 89 to 92 to this report.

4.    Net release from operations has replaced the term Net cash generation. There is no change in how it is determined.

5.    Adjusted operating profit is calculated as operating profit of £1,562m (2015: £1,455m) before taking account of the provision in respect of the closure of our Kingswood office of £66m (2015: £8m).

6.    Adjusted return on equity is calculated by taking profit after tax attributable to equity holders of the Company, excluding the £60m net loss on disposals (2015: £25m net loss) described in note 1, divided by the average shareholders' equity during the period.

7.    Solvency II coverage ratio on a shareholder basis is adjusted for the Own Funds and SCR of the With-profits fund and the final salary pension schemes.

FINANCIAL SUMMARY

£m		2016	2015	Growth %
Analysis of operating profit
Legal & General Retirement		811	641	27
Legal & General Investment Management		366	355	3
Legal & General Capital		257	233	10
Legal & General Insurance		317	315	1
General Insurance		52	51	2
Savings		99	107	(7)
Operating profit from divisions		1,902	1,702	12
Group debt costs		(172)	(153)	(12)
Group investment projects and expenses1		(102)	(86)	(19)
Adjusted operating profit		1,628	1,463	11
Kingswood office closure provision2		(66)	(8)	n/a
Operating profit		1,562	1,455	7
Investment and other variances (inc. minority interests)		80	(75)	n/a
Adjusted profit before tax attributable to equity holders		1,642	1,380	19
Net loss on disposals3		(60)	(25)	n/a
Profit before tax attributable to equity holders		1,582	1,355	17
Profit after tax		1,265	1,094	16
Adjusted earnings per share (p)4		22.20	18.58	19
IFRS earnings per share (p)		21.22	18.16	17
Adjusted return on equity (%)5		19.6	17.7	n/a
Full year dividend per share (p)		14.35	13.40	7
-     Final dividend per share (p)		10.35	9.95	4
-     Interim dividend per share (p)		4.00	3.45	16
Release from operations6		1,256	1,217	3
New business surplus		155	39	297
Net release from operations6		1,411	1,256	12

1.    In 2016, we invested £40m (2015: £50m) to deliver a reduction in operating costs and management expenses.

2.    The Group recorded a £66m (2015: £8m) provision in respect of the closure of our Kingswood office. No further related costs are expected in the future.

3.    Net loss on disposals in 2016 of £60m includes a £64m impairment loss in relation to the disposal of Cofunds and a £4m profit on disposal of Suffolk Life (2015: £25m net loss in relation to the disposals of Legal & General France, Legal & General Gulf, Legal & General Egypt and Legal & General International (Ireland)).

4.    Adjusted earnings per share is calculated by dividing profit after tax attributable to equity holders of the Company, excluding the £60m net loss on disposals (2015: £25m net loss) described in note 3, by the weighted average number of ordinary shares in issue during the period.

5.    Adjusted return on equity is calculated by taking profit after tax attributable to equity holders of the Company, excluding the £60m net loss on disposals (2015: £25m net loss) described in note 3, divided by the average shareholders' equity during the period.

6.    Release from operations and Net release from operations have replaced the terms Operational cash generation and Net cash generation respectively. There is no change in how they are determined.

commentary on 2016 financial performance

Income statement

Net release from operations increased 12% to £1,411m (2015: £1,256m)

The Group delivered £1,411m net release from operations comprising £1,256m (2015: £1,217m) release from operations and £155m (2015: £39m) new business surplus. The increase in release from operations was consistent with the guidance we issued in August 2016. The £116m year-on-year increase in new business surplus was primarily a result of significantly higher new business volumes in LGR, with new annuity sales up 155% at £7.0bn.

Adjusted operating profit increased 11% to £1,628m (2015: £1,463m)

The Group achieved double digit percentage growth in adjusted operating profit for the third consecutive year, demonstrating the successful execution of our strategy.

LGR achieved record operating profits of £811m driven by strong performance from our front and back books, as well as benefitting from higher levels of longevity reinsurance on new business. Longevity experience in the year was once again positive compared to our assumptions. Despite this outcome, we have not materially adjusted our forward-looking longevity reserves.

LGIM operating profit increased by 3%. The combined contribution from positive net flows of £31.2bn (2015: £33.3bn) and higher asset values in the second half, was partially offset by planned investment to grow the business, as well as the impact of ongoing industry fee pressure.

LGC operating profit increased by 10% due to strong performance in the division's £1.1bn (2015: £0.9bn) direct investment portfolio which delivered £121m (2015: £69m) operating profit, of which 44% (2015: 28%) came from earnings in LGC's operating businesses, including CALA Homes.

LGI operating profit was flat year-on-year, in part as a consequence of a £39m lower expected release from the UK retail protection back book, and adverse claims experience of £43m, primarily in group protection. The 2015 comparator for LGI was impacted by one-off reserve strengthening primarily relating to the modelling of reinsurance contracts in retail protection.

Profit before tax attributable to equity holders increased 17% to £1,582m (2015: £1,355m)

In 2016 profit before tax has increased by £227m on the back of the 11% increase in adjusted operating profit. In addition, positive investment and other variances contributed £80m (2015: £(75)m), demonstrating diversification benefits across the Group. This included £162m (2015: £(116)m) in LGC, primarily due to the traded assets portfolio outperforming our long term economic assumptions, and £36m (2015: £78m) in LGR. This was partially offset by £(123)m (2015: £(44)m) in LGI driven by a reduction in UK government bond yields of c.85bps which impacted the discount rate used to calculate the reserves for our UK protection liabilities.

The Group had a net loss on disposal in 2016 of £60m (2015: £25m) following the sale of Cofunds, IPS and Suffolk Life.

Additionally, the Group booked a £66m (2015: £8m) provision in respect of the closure of our Kingswood office. No further related costs are expected in the future.

balance sheet

The Group's Solvency II surplus increased by £0.4bn since the half year, from £5.3bn to £5.7bn at the year end.

This incorporates management's estimate of the impact of recalculating the Transitional Measures for Technical Provisions (TMTP) as at the end of 2016 as we believe this provides the most up to date and meaningful view of our Solvency II position. The conditions set out by the PRA to allow a formal recalculation of the Group's TMTP were not met as at end 2016 but, in line with PRA guidance, a formal recalculation will take place no later than 1^st January 2018.

As we stated at our Capital Markets Event on 5^th December 2016, to assist with peer comparability, going forwards we will lead with coverage ratio defined on a shareholder basis which progressed from 163% at the half year to 171% at the year end. On a proforma basis of calculation, our Solvency II coverage ratio increased from 158% at the half year to 165% at the year end. The surplus is the same on both bases.

The Group remains focused on delivering appropriate returns on capital. In 2016, our Solvency II new business strain was less than £100m in a year when we wrote a record £7bn of new annuity business as we continued to deliver our capital efficient strategy.

outlook

We remain confident in outlook for the Group as our strategy is aligned to, what we believe to be, established long term growth drivers of; ageing demographics; globalisation of asset markets; creating new real productive assets; reform of the welfare state; technological innovation; and providing "today's capital". Our focus on attractive high growth markets, coupled with increasing expertise, is expected to deliver further profit growth, built on our resilient IFRS and Solvency II balance sheets. With further political and economic uncertainty anticipated in 2017 and beyond, we expect further market volatility. The risk of slowing global economic activity remains and no business model can be fully immunised. However, we believe the opportunities available to the Group, primarily in the UK and US, remain attractive.

Our operating model is built on clear synergies between our core divisions. LGIM is the UK market leader in providing LDI solutions to defined benefit (DB) pension scheme clients, which can be a precursor to pension risk transfer (PRT) transactions in LGR, such as the £1.1bn Vickers Group Pension Scheme buy-out in 2016. LGR, the market leader in UK PRT, has over £54bn of assets actively managed by LGIM and potential for matching adjustment compliant direct investments being developed by LGC. LGI provides significant Solvency II diversification benefits contributing to sustainable levels of new business surplus in the Group.

In LGR, demand for pension de-risking strategies remains strong. We are currently quoting on c.£13bn of buy-in and buy-out deals in the UK. We will remain disciplined in the deployment of our capital, and will only select PRT and longevity opportunities that meet our return on capital hurdle rates. In October 2016, we commenced a distribution agreement with Aegon to offer our individual annuities to their pension customers with sales of c.£190m expected in the first 12 months. The lifetime mortgage market is expected to grow to £2.8bn in 2017 and we anticipate writing c.£0.8bn of new business in the year.

LGIM is targeting further outperformance of market net fund flows. The business will maintain a client focused, low cost fee model, however, we anticipate further fee pressure in the asset management industry. We will continue our investment in technology, client propositions and overseas distribution to maintain momentum in net flows. Our market leading Solutions business is well placed to support DB pension schemes as they de-risk. In the defined contribution (DC) market, LGIM continues to gain market share and we expect the number of members of our workplace schemes to increase to around 2.5m in 2017. We expect our US business to expand its asset base in Index, Active Fixed Income and Solutions as we seek to establish ourselves as a leading US pension solutions provider.

LGC is planning to invest over £0.5bn of shareholder capital in direct investments in 2017. In Housing, we plan to expand our build to sell and build to rent businesses into affordable and senior living, which will incorporate modern factory construction methods. For the Infrastructure sector, we will build on our successful Urban Regeneration model, increasing the number of cities we invest in. We will also expand our SME funding initiatives across equity and new debt products. We expect our operating profit and profit before tax from LGC's direct investments to grow further in 2017 and beyond. We are also targeting proceeds of c.£250m from asset disposals, representing an uplift to our carrying values at the year-end 2016. LGC's £3.8bn traded asset portfolio significantly outperformed our long term assumptions in 2016, however, we do not anticipate a similar outperformance in 2017. 

In LGI, we expect operating profit to grow in 2017 as we have started the process of addressing areas of poor performance in our UK group protection business. Although operating in a mature sector, our UK leading retail protection business is targeting further operating profit growth in 2017, and will continue to provide good customer outcomes and attractive returns for our shareholders. We will also focus on accelerating the digital transformation of our US protection business including diversifying distribution and products, building on our proven expertise in the UK.

In General Insurance, we see the potential to grow the business through distribution agreements and increased growth in the direct channel. Recently signed distribution agreements in aggregate are expected to increase gross premiums by c.10% in 2017. Despite recent poor weather in the UK, General Insurance has had a strong start to 2017, however, exceptional weather events can impact future profitability.

Our Mature Savings operation is largely closed to new business. We will continue to focus on customer service whilst actively managing costs.

FULL year DIVIDEND UP 7%

In March 2016, Legal & General adopted a progressive dividend policy reflecting the Group's expected medium term underlying business growth, including net release from operations and operating earnings. There is no change to this dividend policy.

In line with our policy, the Board has considered the best trajectory of dividend growth, taking into account sustainability across a wide range of economic scenarios and the Group's anticipated financial performance. Accordingly, the Board has recommended a final dividend of 10.35p (2015: 9.95p) giving a full year dividend of 14.35p (2015: 13.40p), 7% higher than 2015.

LEGAL & GENERAL RETIREMENT

FINANCIAL HIGHLIGHTS £m			2016	2015
Release from operations			433	374
New business surplus			159	45
Net release from operations			592	419
Experience variances, assumption changes, tax and non-cash movements			219	222
Operating profit			811	641
Investment and other variances			36	78
Profit before tax			847	719
Back book acquisitions			2,945	-
UK PRT			3,338	1,977
International PRT			347	440
Individual annuity single premiums			378	327
Lifetime mortgage advances			620	201
Longevity insurance1			900	-
Total LGR new business			8,528	2,945
Annuity net inflows (£bn)			4.3	0.4
Total annuity assets (£bn)			54.4	43.4

1.  Represents a reinsured longevity insurance deal transacted in December 2016. The £900m quoted represents the notional size of the transaction and is based on the present value of the fixed leg cashflows discounted at the LIBOR curve.

increased scale and profitability

LGR had another strong financial performance in 2016 achieving record profits. Total new business was up 190% at £8.5bn (2015: £2.9bn).  

Release from operations increased 16% to £433m (2015: £374m), reflecting the growth in the scale of the business over the last few years and the release of prudential margins associated with that larger annuity fund. This also includes a contribution from our Legal & General Home Finance business.

Net release from operations increased 41% to £592m (2015: £419m) with new business surplus of £159m (2015: £45m) reflecting higher levels of new business and greater use of longevity reinsurance. UK annuity sales delivered a 10.4% new business margin on SII capital.

Operating profit increased to £811m (2015: £641m) which included increased favourable mortality experience compared to our best estimate assumptions. However, we have not made any material adjustments to our forward-looking longevity assumptions despite the recurrence of further positive in-year longevity experience.

STrong demand for de-risking strategies

The need for products and services to manage the consequences of ageing populations is increasing, and our strategy is to be at the forefront of providing those products and services. Our core business themes of Global Pension Risk Transfer for our corporate customers and Individual Retirement Choices for our retail customers are there to meet these substantial and growing needs.

Global Pension Risk Transfer

In 2016, LGR completed £3,685m (2015: £2,417m) of buy-in and buy-out transactions and a longevity insurance transaction of £900m.

2016 was a good year for the UK pension de-risking market. LGR achieved the largest pension buy-out of the year with £1.1bn Vickers Group Pension Scheme, part of the Rolls-Royce Group, covering over 11,000 members. This transaction further demonstrates the strength of our de-risking proposition as we transitioned Vickers from a liability driven investment (LDI) customer in 2007 to a full buyout in 2016. In addition, we completed £1.5bn of buy-ins with the ICI Pension Fund, including £750m in the fortnight after the EU referendum vote. In the US we completed six bulk deals in 2016 totalling $448m premiums. We also transacted a £900m longevity insurance deal in December 2016 which we expect to fully reinsure.

The UK private sector defined benefit market is estimated to have £2.1 trillion liabilities, with only c.5% transacted to date. Two thirds of large pension plans expect to use pension risk transfer by 2020, and consequently our UK market pipeline for pension risk transfer remains strong.  We are currently quoting on c.£13bn of UK buy-in and buy-out deals and a variety of longevity insurance opportunities.  Whilst lower real yields increase the average pension fund deficit, the impact on pension funds depends on the amount of LDI hedging they have done, the extent to which equities have been switched to bonds, and the extent to which equities have been diversified globally with or without currency hedging. We estimate that nearly 50% of the interest rate and inflation risk has been removed from the UK private sector defined benefit system.

Pension funds are increasingly looking to de-risk in steps that can include tranches of pensioner buy-ins, top-slicing, or longevity insurance as a first step.  Pension funds do not need to be fully funded or fully hedged to make progress.  Legal & General is well placed for this incremental approach as a financially sound partner, committed to the pension risk transfer market. We are unique in being able to offer all possible pension risk transfer and DB pension de-risking steps. 

Our aim is to recreate this disciplined approach in the US, with our US PRT business making progress in 2016. Our reinsurance hub, L&G Re, A 'plus' rated, in a Solvency II equivalent regime, and with registered reinsurer status in the Netherlands, allows us to participate as a reinsurer in the Dutch pension risk transfer market. 

Individual Retirement Choices

Sales of individual annuities and lifetime mortgages reached £1bn in LGR's Retail Customer business in 2016. This business area now manages almost £20bn in assets for its 500,000 individual annuity customers. Chris Knight was appointed Managing Director of this business in January 2017.

Individual annuity sales were up 16% on 2015 at £378m (2015: £327m) and are set to grow further in 2017. In July, we agreed an arrangement with Aegon where Legal & General would be Aegon's preferred supplier of annuity business from October 2016. We expect this arrangement to increase LGR's individual annuity volumes by approximately 50%.

Legal & General Home Finance has made an exceptionally strong entry into the Lifetime Mortgage market since April 2015, writing £620m in 2016 (2015: £201m), and now has over 10,000 customers. The market is expected to grow substantially from £2.2bn of annual lending in 2016. This fact coupled with an estimated £1.5 trillion of housing equity currently owned by the over 55s in the UK, makes the long-term growth characteristics of this market strong. Additionally, we are helping to solve the problem of interest-only mortgages for those who have high levels of equity in their house.

In 2016 we signed distribution agreements with Santander and continue to broaden our distribution to offer lifetime mortgages. We anticipate that this will result in up to an additional £100m of lifetime mortgages per annum. We secured Solvency II matching adjustment treatment from the PRA for our lifetime mortgages in Q4 2016.

Industry consolidation

The combination of Freedom & Choice in Pensions and the introduction of the EU's Solvency II regime has already led to consolidation among individual annuity providers. We participated in this consolidation in May 2016 with the acquisition of a £2.9bn back book of individual annuities from Aegon. We expect there to be further consolidation opportunities over time but we will only pursue these if they have sufficiently attractive return characteristics.

ONGOING credit and ASSET management

Credit portfolio management

LGR's £54.4bn asset portfolio backing its IFRS liabilities is well diversified. We hold £2.7bn of IFRS credit default reserves (2015: £2.2bn) against these assets and have experienced less than £10m in defaults in the last 5 years, with no defaults in 2016. Within the £49.5bn bond portfolio, just over 2/3rds of the portfolio is A-rated or better, 29% BBB-rated and 2% sub-investment grade. The bond portfolio has 14% in gilts, 5% in Banks, 4% in Energy, Oil & Gas, and 5% in bonds in the property sector, illustrating the high degree of diversification in the portfolio.

Direct Investment

Our direct investment portfolio is secured through directly negotiated covenants and security or collateral. This portfolio is now £8.1bn, (2015: £5.7bn) including £852m in lifetime mortgages, and makes up c.15% of the assets within the annuity portfolio. With the Group's balance sheet size and the long term nature of LGR's liabilities, LGR is able to invest in assets of size and term that differentiates it from many other investors. The ability to self-manufacture attractive assets to back annuities, working with LGIM, LGC, or through lifetime mortgages, is an important feature of LGR's business as the hunt for yield continues with lower for longer interest rates. 

In 2016 LGR has invested over £2bn in direct investments, including infrastructure, housing and lifetime mortgages, over double last year's investment. Notable investments in 2016 include the funding of the new Amazon distribution centre in Tilbury, and the third berth at the London Gateway port.

LEGAL & GENERAL investment management

FINANCIAL HIGHLIGHTS £m			2016	2015
Management fee revenue			714	651
Transactional revenue			30	43
Total revenue			744	694
Total costs			(372)	(335)
Asset management operating profit			372	359
Workplace Savings (admin only) operating loss1			(6)	(4)
Operating profit			366	355
Investment and other variances			(32)	(20)
Profit before tax			334	335
Net release from operations			286	281
Cost:income ratio2 (%)			49	48
External net flows (£bn)			29.2	37.7
Internal net flows (£bn)			2.0	(2.1)
Disposal of LGF assets (£bn)			-	(2.3)
Total net flows (£bn)			31.2	33.3
Of which international (£bn)			14.5	9.5
Persistency (%)			91	92

£bn			2016	2015
Assets under management, including overlay assets3			894.2	746.1
Advisory assets			7.8	10.5
Total assets			902.0	756.6
Of which:
- International assets under management, including overlay assets3			177.4	122.4
- Advisory assets			7.8	10.5
- Total international assets			185.2	132.9
Assets under administration - Workplace Savings			20.8	14.7

1.  Represents Workplace Savings admin only and excludes fund management profits.

2.  Excluding Workplace Savings and recoverable market data costs which are treated as a cost of sale.

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.

strong performance in uncertain environment

LGIM continues to expand its business across channels, regions and product lines. External net flows were £29.2bn (2015: £37.7bn), contributing to 20% growth in assets under management (AUM) to £894.2bn (2015: £746.1bn). Revenues from management fees were up 10% to £714m (2015: £651m), while transactional revenues were lower at £30m (2015: £43m) due to the decision to discontinue box profits (2015: £11m). Operating profit increased by 3% to £366m (2015: £355m), reflecting higher AUM growth occurring later in the year, partially offset by planned investment to grow the business, and ongoing industry fee pressure.

The International business experienced net inflows of £14.5bn (2015: £9.5bn), with a particularly strong performance in the US business and higher flows in Europe, the Gulf and Asia. The DC business continued to expand, with net inflows of £2.0bn (2015: £2.9bn) driven by our bundled business, which offers investment and administration services to DC schemes. The retail business experienced net inflows of £1.4bn (2015: £1.2bn) and was ranked third in UK net sales in 2016 (Source: Pridham), despite challenging retail market conditions.  

breadth of investment management solutions

			Active
Asset movements		Index	fixed	Solu-	Real	Active	Total	Advisory	Total
£bn		funds	income	tions	assets	equities	AUM	assets	assets
At 1st January 2016		274.3	106.8	338.2	18.3	8.5	746.1	10.5	756.6
External inflows		35.2	10.8	19.9	1.4	-	67.3		67.3
External outflows		(45.0)	(6.5)	(12.4)	(1.2)	(0.2)	(65.3)		(65.3)
Overlay / advisory net flows		-	-	27.2	-	-	27.2	(5.4)	21.8
External net flows	(9.8)		4.3	34.7	0.2	(0.2)	29.2	(5.4)	23.8
Internal net flows	(0.3)		1.5	-	0.7	0.1	2.0	-	2.0
Total net flows	(10.1)		5.8	34.7	0.9	(0.1)	31.2	(5.4)	25.8
Cash management movements	-		(0.7)	-	-	-	(0.7)	-	(0.7)
Market and other movements	55.6		22.9	39.0	0.4	(0.3)	117.6	2.7	120.3
At 31st December 2016	319.8		134.8	411.9	19.6	8.1	894.2	7.8	902.0

Total AUM increased 20% to £894.2bn (2015: £746.1bn). Total external net inflows were £29.2bn (2015: £37.7bn) despite political and economic uncertainty and represent c.4% of opening AUM. Positive flows across our main product lines, client channels and regions demonstrate the breadth of LGIM's business model. In a challenging year for active managers in which the majority underperformed, LGIM delivered consistent strong performance for its active clients, with the majority of our funds outperforming their respective benchmarks over the past one, three and five years.

Solutions net inflows were strong at £34.7bn (2015: £34.7bn), as DB pension schemes implement LDI strategies and DC schemes seek a range of multi-asset and drawdown strategies.

Index external net outflows were £9.8bn in 2016 (2015: £5.4bn). Net outflows were largely from UK DB clients switching into other products, primarily Solutions. There were net inflows from international and retail clients as the Index business diversifies. We are well positioned for the continued de-risking of DB schemes, taking clients from traditional index strategies, through LDI and multi-asset capabilities, to solutions that combine LDI and credit.

Net external inflows into Active Fixed Income of £4.3bn (2015: £7.7bn) were driven primarily by institutional clients in the UK and US with growing demand from clients in other regions. 

The Retail business has performed well despite net industry sales falling to their lowest level since 1995 (Source: Pridham report). Against this backdrop, the business has gained market share and AUM increased to £24.1bn (2015: £19.9bn). 

Real Assets was adversely impacted by fewer transactions in the property market in 2016. All of LGIM's unitised property funds remained open post the EU Referendum vote, and net inflows resumed in Q4 contributing to overall AUM of £19.6bn (2015: £18.3bn). We continued to develop innovative direct investment solutions to meet our clients' needs, such as the recently launched Build to Rent fund.

WORKPLACE PENSIONS benefit from SME market

LGIM is well positioned to benefit from the rapid growth of the UK DC market, experiencing a 23% increase in customers on our Workplace platform to more than 2.2m (2015: 1.8m). Net flows were £2.0bn (2015: £2.9bn) and contributed to £20.8bn of assets on our Workplace platform. In 2016, LGIM acquired a 16.5% stake in Smart Pension, an online auto-enrolment platform, which has enhanced our presence in the SME market. The number of pension schemes supported by the DC business has grown to over 9,400 (2015: 4,376). Total LGIM DC AUM increased by 24% to £57.1bn (2015: £46.1bn). 

INTERNATIONAL expansion continues 

LGIM delivered strong net inflows of £14.5bn (2015: £9.5bn) in its international businesses. Total International AUM was £177.4bn, a 45% increase (2015: £122.4bn). Along with positive flows and rallying equity markets, the devaluation of sterling during the year had a significant impact on the increase in AUM.

Net inflows in the US business were £9.4bn (2015: £6.3bn), with significant growth in Index and continued strength in Solutions and Fixed Income. In November 2016, Aaron Meder was appointed Chief Executive Officer of LGIM America.

European net inflows were £2.6bn (2015: £2.0bn), driven by growing interest in our index and multi-asset products and supported by the launch of additional products. In the Gulf, net inflows were £1.6bn (2015: £0.6bn). Asian net inflows for the period were £0.8bn (2015: £0.8bn). In Japan, we signed a second co-operation agreement, are establishing a regional office in Tokyo, and in Hong Kong we are developing our trading and fund management capabilities. 

LEGAL & GENERAL CAPITAL

FINANCIAL HIGHLIGHTS £m			2016		2015
Net release from operations			214		187
Operating profit from:
UK Housing			61		31
Infrastructure			51		33
SME finance			10		5
Direct investment operating profit			121		69
Traded investment portfolio			122		154
Treasury assets			14		10
Total operating profit			257		233
Investment and other variances			162		(116)
Profit before tax			419		117
DIRECT INVESTMENT PORTFOLIO1 £m				2016	2015
UK Housing				392	345
Infrastructure				591	428
SME Finance				154	94
				1,137	867
TRADED PORTFOLIO2 £m
Equities				1,714	1,552
Fixed income				492	480
Multi-asset				150	133
Cash				1,418	1,048
				3,774	3,213
LGC investment portfolio				4,911	4,080
Treasury assets at holding company £m				1,282	1,585
Total				6,193	5,665

1. Direct Investment portfolio excludes two LGC assets valued at £91m at 31 December 2016 which have entered advanced disposal negotiations and are classified as "assets held for sale" and reported separately.

2. Traded portfolio in 2015 restated to show reclassification of assets held within underlying fund structures.

DIRECT INVESTMENT STRATEGY delivers record profits

The direct investment portfolio delivered operating profit of £121m (2015: £69m) and profit before tax of £94m (2015: £73m), representing a net portfolio return of 9.0% (2015: 9.2%). Direct investments increased 31% to £1,137m (2015: £867m).

Since it was established in 2013, LGC has trebled its total direct investments to over £1bn, with investments in all its key sectors of UK Housing, Infrastructure and SME finance. Driven by long term social and economic trends, LGC invests in enterprises where funding gaps exist which we expect to be met through future long term direct investors. We target attractive risk-adjusted returns for shareholders by building successful platforms and generating returns by delivering the direct investment pipeline. We work alongside trusted partners with proven experience in several joint ventures in a disciplined way. Innovative direct investing attracts long term co-investors which further underpins improved UK growth. We also create investment opportunities for our LGR business. Throughout, we ensure we meet our Group liquidity requirements and maintain the Group's capital strength. We are planning to invest over £0.5bn of shareholder capital in direct investments in 2017.

We are also targeting proceeds of c.£250m from asset disposals which will deliver additional funding for re-investment. We are already in discussions with external parties to dispose of several developed property assets in our portfolio, including One Central Square in Cardiff, thus demonstrating the liquidity of our direct investment strategy.

Operating profit for direct investments is calculated as a share of the investments' own trading profits less costs or a smoothed IRR basis. Direct investment trading profits from our operating businesses, such as CALA Homes, are recognised as our share of their profit before tax, and delivered £53m, representing 44% of direct investment operating profit (2015: £19m, 28%). For projects, profit before tax is based on an independently verified valuation plus any net revenue from these assets.

Housing operating profit increased 97% to £61m in 2016 (2015: £31m), assets increased to £392m (2015: £345m)

CALA Homes¹ had a very strong year to 31^st December 2016, delivering a record number of homes sold of 1,476, and revenues of £718m, 62% and 43% increases respectively from the previous year. This delivered profit before tax for LGC, net of expenses, of £31m (2015: £16m). In the second half of 2016, CALA Homes secured planning consent on 15 sites, which is expected to deliver 1,533 new homes with a gross development value (GDV) of £648m.

LGC launched a build-to-rent JV with PGGM in early 2016 which, including the newly created L&G managed build to rent fund, now has £940m of committed funds and over 900 homes under development in Walthamstow, Bristol and Salford. Work has also started to build 1000 new homes at our 250-acre site at Crowthorne with a GDV of approximately £450m. We also launched a modular homes business which will modernise home building with innovative precision built modular housing. Strong interest is being seen from prospective buyers.

Infrastructure operating profit increased 55% to £51m in 2016 (2015: £33m), assets increased to £591m (2015: £428m)

During 2016, the urban regeneration business continued to grow. In Cardiff, our investment in One Central Square at the site adjacent to BBC Wales' new HQ (acquired by LGR in 2015), has been 100% let, with development commencing on a third asset in 2017. The £240m Bracknell Town Centre development (The Lexicon) is progressing well towards the planned opening in September 2017. MediaCityUK (Salford) is trading well and we have agreed plans to double the size of the estate over 10 years, with a GDV of over £1bn, with LGC retaining options over the pipeline of assets.

LGC also agreed a new partnership with Newcastle City Council and University to develop the £350m Science Central 24-acre science and technology hub. This is set to create over 4,000 jobs, 500,000 sq ft of office space and 450 new homes plus asset opportunities for LGR.

In clean energy, NTR onshore wind construction fund reached final close in 2016, at €246m, with over 66% deployed, and a €500m NTR Fund II is targeted for launch in 2017.

In addition to the opportunities available through existing partners, we will continue to work with the UK Department of International Trade to identify investment opportunities across the UK.

SME Finance operating profit increased 100% to £10m in 2016 (2015: £5m), assets increased to £154m (2015: £94m)

Pemberton announced the final close of its first mid-market loan fund at the beginning of November at €1.2bn with 53% now deployed. The fund has secured commitments from 27 insurance and pension investors across Europe, the US and Asia. New strategies for 2017 include a UK Sterling loan fund and Trade Receivables fund, in total targeting €3bn AUM by the end of the year.

LGC also invested keystone funds in Accelerated Digital Ventures which is set to provide capital to the emerging UK SME sector, supported by a co-investment from the British Business Bank and Woodford Investment Management.

TRADED PORTFOLIO

LGC's traded investment portfolio delivered operating profit of £122m (2015: £154m). Treasury assets contributed a further £14m (2015: £10m) to operating profit. The investment variance on the traded investment portfolio and treasury assets was £189m (2015: £(120)m), resulting in a combined profit before tax of £325m (2015: £44m).

The traded portfolio holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash. Overall, operating profit has decreased by 21% in the year following a re-positioning of the portfolio, reducing risk through holding more cash and increased hedging activity, leading to a reduced return expectation. The portfolio performed above assumed returns over the year, benefiting from positive equity market performance in particular UK and Emerging Market exposures. The portfolio also benefited from a currency translation effect on foreign holdings, notably on USD denominated assets, from the devaluation of GBP following the market reaction to the outcome of the EU Referendum.

LGC holds cash for a variety of reasons including working capital, collateral to cover derivative trades and cash awaiting longer term investment. In addition, Group Treasury holds cash and near cash investments to cover a range of uses including working capital, upcoming interest and dividend payments, derivative collateral requirements and contingency funding for the Group.  The treasury liquid assets also include working capital balances from various business units.

1. LGC owned a 47.9% share in CALA Homes as at 31^st December 2016. Performance metrics are based on CALA Homes calendar year, with data sourced from the company's unaudited management accounts as its financial year-end is 30^th June.

LEGAL & GENERaL INSURANCE

FINANCIAL HIGHLIGHTS1 £m			2016	2015
Release from operations			317	328
New business surplus			23	25
Net release from operations			340	353
Experience variances, assumption changes, tax, international and non-cash movements			(23)	(38)
Operating profit			317	315
-  UK			216	204
-  US			85	83
-  Netherlands			16	16
-  France2			-	12
Investment and other variances			(123)	(44)
Profit before tax			194	271
UK Protection new business annual premiums			228	231
Retail Protection gross premiums			1,179	1,112
Group Protection gross premiums			333	330
US Protection gross premiums			897	773
Total UK and US gross premiums			2,409	2,215

1.             Reported consolidated numbers reflect the new Insurance divisional structure announced in 2016.

2.             Legal & General France disposal completed on 31^st December 2015.

In November 2016, the Group announced the formation of Legal & General Insurance (LGI) which combined our UK and US Protection businesses, with Bernie Hickman appointed Chief Executive Officer. The new Insurance division provides life insurance, critical illness cover, and income protection to over 7 million individuals and company employees in the UK and US.

LGI UK

continued growth in premium income

Retail Protection gross premium income increased 6% to £1,179m (2015: £1,112m) with new business annual premiums of £170m (2015: £162m). We remain the leading 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 £31m, representing 7% growth on 2015 and accounts for 18% of new business APE (2015: £29m, 18% of new business APE). Group Protection gross premium income was £333m (2015: £330m) with new business of £58m (2015: £69m).

Legal & General Mortgage Club facilitated £53bn of mortgages in 2016 (2015: £46bn) through strong partnerships with top lenders and over 10,000 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. Legal & General Surveying Services continues to deliver a strong performance, completing over 523,000 surveys (2015: 482,000).

SUSTAINED operating profit

Release from operations from our UK business was lower at £185m (2015: £244m) following the change to the modelling of reinsurance contracts in retail protection in 2015, to ensure sufficient prudence is being held in later years. New business surplus was £23m (2015: £25m) driven primarily by the competitive market environment and refinement of our models.

LGI UK operating profit increased 6% to £216m (2015: £204m), with the one-off reserve strengthening impacting the 2015 comparator, partially offset by the lower net release from operations and £43m adverse claims experience, primarily in group protection where we reinsure significantly less risk than on our retail protection book.

We expect 2016 to be the LGI UK operating profit base level from which the business will grow in 2017 and onwards, with continued growth in retail protection supported by an improved group protection performance as we address specific areas of poor performance.

Profit before tax impacted by interest rates

LGI UK's profit before tax reduced to £84m (2015: £226m), as a result of a negative investment variance of £(132)m (2015: £22m) following a reduction in UK government bond yields of c.85bps which impacted the discount rate used to calculate the reserves for our UK protection liabilities.

LGI US FINANCIAL HIGHLIGHTS $m			2016	2015
Net release from operations			91	83
Operating profit			115	125
Gross premium income			1,220	1,183

INCREASED CONTRIBUTION TO CASH and profits

Net release from operations increased by 10% (17% on a sterling basis) to $91m (2015: $83m). This represents the dividends paid by Legal & General America to the Group.

Operating profit decreased 8% (up 2% on a sterling basis) to $115m (2015: $125m), primarily due to higher mortality experience with profit before tax of $119m, up 13% (27% on a sterling basis).

Gross premium revenue increased 3% (16% on a sterling basis) to $1,220m (2015: $1,183m) due to continued strong persistency of our core term product. LGI US is the tenth largest provider of term life assurance by annual premium equivalent in the US and is the fourth largest provider through the brokerage channel. LGI US has 1.2m policies in force (2015: 1.2m).

In 2015, LGI US adjusted its protection new business pricing to be better positioned in the market. These changes allowed for the pricing of risk at a more granular level which has raised prices at lower margin price points and reduced prices elsewhere. The impact of this has been improved new business margins and reduced new business volumes. LGI US maintained this disciplined approach in 2016, resulting in a strong Solvency II new business margin of 12.4%. New annual premiums decreased 21% to $84m (2015: $106m).

Legal & General America paid its 2017 dividend in February of this year, up 10% to $100m (2015: $91m).

General Insurance

FINANCIAL HIGHLIGHTS £m			2016	2015
Net release from operations			42	41
Experience variances, assumption changes, tax and non-cash movements			10	10
Operating profit			52	51
Investment and other variances			16	(8)
Profit before tax			68	43
General Insurance gross premiums			326	337
Combined operating ratio (%)			89	89

increase in profits and direct premium income

Operating profit increased to £52m (2015: £51m) with a combined operating ratio of 89% (2015: 89%). This was despite the introduction of the annual Flood Re levy of £9m which added 3% to the combined operating ratio.

General Insurance gross premiums were down 3% at £326m (2015: £337m) as we maintained pricing discipline in a competitive market. Our direct business delivered GWP of £121m in 2016, representing 20% growth on 2015 and now accounts for 37% of gross premiums (2015: £101m, 30% of gross premiums).

In December 2016, Cheryl Agius was appointed Chief Executive Officer of General Insurance. The division has 1.3m policyholders (2015: 1.4m) covering household, travel and pet insurance products. Additionally, General Insurance signed distribution agreements with several leading UK financial institutions which in aggregate are expected to increase 2017 gross premiums by around 10%.

savings

FINANCIAL HIGHLIGHTS £m			2016	2015
Release from operations			104	125
New business strain			(5)	(9)
Net release from operations			99	116
Experience variances, assumption changes, tax and non-cash movements			-	(9)
Operating profit			99	107
- Mature Savings			105	106
- Digital Savings			(6)	1
Investment and other variances			9	3
Net profit / (loss) on disposals			(60)	-
Profit before tax			48	110

lower contribution from mature savings

Release from operations reduced to £104m (2015: £125m) as we continue to manage the reducing contribution from our declining Mature Savings business. Net release from operations was £17m lower at £99m (2015: £116m), with new business strain of £5m (2015: £9m) as we actively manage the cost base.

Operating profit in Mature Savings remains strong at £99m (2015: £107m). The introduction of robotics has increased automation and allowed us to reduce unit costs. Favourable market movements contributed £9m (2015: £3m) to profit before tax.

The Group completed the sale of Cofunds and IPS to Aegon on 1^st January 2017 for a total consideration of £147.5m, resulting in a £64m impairment loss in 2016. On 25^th May 2016, the Group announced the completion of the sale of Suffolk Life to Curtis Banks Group for £45m, resulting in a £4m profit on disposal.

The Digital Savings operating loss in 2016 was £6m (2015: £1m operating profit).

Mature Retail Savings business outflows of £(3.0)bn (2015: £(5.8)bn), and assets under administration of £30.7bn (2015: £29.6bn). 

Mature Savings outflows reduced year on year due to the reducing maturity profile of some products, particularly Endowments. 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 c.80% or 13,000 customers, electing to take cash payments. Our average payment size is £14k. This compares to c.60% of customers taking cash before the reform legislation was announced.

Disposals

On 1^st January 2017, the Group completed the sale of Cofunds and IPS to Aegon for total consideration of £147.5m. The Cofunds business was acquired in stages between 2005 and 2013, for a total cash consideration of £153m. Investment in Cofunds subsequent to the acquisition as well as our IPS platform, including capitalised costs in respect of the Retail Distribution Review, resulted in an impairment loss of £64m. This was offset by a £4m profit on disposal of Suffolk Life, resulting in total net loss on disposals of £60m in 2016.

In November 2016, Legal & General reached an agreement in principle with Chesnara plc to sell Legal & General Nederland Levensverzekering Maatschappij N.V. for €160m. The sale is expected to complete in H1 2017. During the year, Legal & General Netherlands contributed £70m (2015: £29m) of dividends to LGI due to a favourable surplus capital position.

The sale of Legal & General France to APICIL Prévoyance completed on 31^st December 2015.

Net release from operations BACKED BY dividends TO GROUP

The 2016 full year dividend of £854m reflects net release from operations coverage of 1.65 times (2015: 1.58 times).

				2016			2015
			Net release from operations	Subsidiaries' dividends to Group	Dividend % of Net release from operations	Net release from operations	Subsidiaries' dividends      to Group	Dividend % of Net release from operations
£m
Total			1,411	1,085	77	1,256	1,003	80
External dividend			854			797
Dividend coverage			1.65			1.58

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 (2015: £3.1bn). There is also a further £0.4bn (2015: £0.5bn) of operational borrowings including £0.2bn (2015: £0.6bn) of non-recourse borrowings.

Group debt costs of £172m (2015: £153m) reflect an average cost of debt of 5.4% per annum (2015: 5.3% per annum) on average nominal value of debt balances of £3.2bn (2015: £2.9bn).

taxation - effective tax rate of 20.0%

Equity holders' Effective Tax Rate (%)			2016	2015
Equity holders' total Effective Tax Rate			20.0	19.3
Annualised rate of UK corporation tax			20.00	20.25

In 2016, the Group's effective tax rate was in line with the UK corporation tax rate. This reflects the overall positive impact from differences between the measurement of accounting and taxable profits, offset by the average higher rates of taxes applied on overseas profits.

SOLVENCY II

As at 31^st December 2016, the Group had an estimated Solvency II surplus of £5.7bn over its Solvency Capital Requirement, corresponding to a Solvency II coverage ratio of 171% on a shareholder basis. The Cofunds disposal, which completed on 1^st January 2017, will provide a c.1.5% coverage ratio benefit in 2017.

Capital (£bn)1			2016	2015
Own Funds			13.6	12.8
Solvency Capital Requirement (SCR)			(7.9)	(7.3)
Solvency II surplus			5.7	5.5
SCR coverage ratio (%)			171%	176%

1.             Solvency II position on a shareholder basis as at 31^st December and before the accrual of the final dividend.

Analysis of movement from 1st January to 31st December 2016 (£bn)				Solvency II surplus
Operational surplus generation				1.2
New business strain				(0.1)
Net surplus generation				1.1
Dividends paid				(0.8)
Operating variances				0.2
Market movements				(0.3)
Total surplus movement (after dividends paid in the year)				0.2

The increase in surplus reflects the surplus generated over 2016 net of dividends paid of £0.8bn and interest payments on the Group's debt of £0.2bn. The net surplus generation was £1.1bn, after allowing for the amortisation of 1/16th of the opening Transitional Measures on Technical Provisions (TMTP). New business strain was £0.1bn. The total surplus generation includes a negative investment variance of £0.3bn reflecting market movements over 2016, in particular falls in risk free rates.

Operating variances include the impact of experience variances, changes to valuation and capital calibration assumptions, changes to planned volumes of new business, tax rate changes, PRA approval of changes to the Internal Model and Matching Adjustment, (in particular the inclusion of Lifetime Mortgages as assets eligible for Matching Adjustment), and other management actions including changes in asset mix and hedging strategies.

When stated on a proforma basis, including the SCR attributable to our With-profits fund of £0.5bn and the final salary pension schemes of £0.2bn in both the Group's Own Funds and the SCR, the Group's coverage ratio was 165% (2015: 169%).

The analysis incorporates management's estimate of a recalculation of the TMTP as at the end of 2016. The conditions set out by the the PRA to allow a formal recalculation of the Group's TMTP were not met as at end 2016 but, in line with PRA guidance, a formal recalculation will take place no later than 1^st January 2018. Therefore, the disclosed Solvency II position on a shareholder basis and proforma basis do not reflect the regulatory capital position as at 31^st December 2016. This will be made public in May 2017.

reconcilation of ifrs net release from operations to solvency ii net


surplus generation

The table below gives a reconciliation of the Group's IFRS Release from operations and Solvency II Operational surplus generation in 2016:

	£bn
IFRS Release from operations	1.3
Expected release of IFRS prudential margins	(0.5)
Release of IFRS specific reserves	(0.1)
Solvency II investment margin	0.2
Release of Solvency II Capital Requirement and Risk Margin less TMTP amortisation	0.4
Other Solvency II items and presentational differences	(0.1)
Solvency II Operational surplus generation	1.2

The table below gives a reconciliation of the Group's IFRS New business surplus to Solvency II New business strain in 2016:

				£bn
IFRS New business surplus				0.2
Removal of requirement to set up prudential margins above best estimate on new business				0.5
Set up of Solvency II Capital Requirement on new business				(0.7)
Set up of Risk Margin on new business				(0.1)
Solvency II New business strain				(0.1)

Sensitivity analysis

	Impact on net of tax Solvency II capital surplus 2016 £bn	Impact on net of tax Solvency II coverage ratio 2016 %
Credit spreads widen by 100bps assuming a level addition to all ratings	0.4	10
Credit spreads widen by 100bps assuming an escalating addition to ratings	0.2	7
Credit spreads narrow by 100bps assuming a level addition to all ratings	(0.4)	(9)
Credit spreads narrow by 100bps assuming an escalating addition to ratings	(0.2)	(7)
Credit migration	(0.6)	(8)
20% fall in equity markets	(0.4)	(5)
40% fall in equity markets	(0.8)	(9)
20% rise in equity markets	0.5	5
15% fall in property markets	(0.2)	(3)
15% rise in property markets	0.2	3
100bps increase in risk free rates	1.0	22
50bps fall in risk free rates	(0.5)	(10)
Future inflation expectation increase by 50bps	(0.1)	(3)
1% reduction in annuitant base mortality	(0.2)	(2)
1% increase in annuitant base mortality	0.2	2
Substantially reduced Risk Margin	0.1	1

The above sensitivity analysis does not reflect all of the management actions which could be taken to reduce the impacts. In practice, the group actively manages its asset and liability positions to respond to market movements. These results all allow (on an approximate basis) for the recalculation of estimated TMTP as at 31^st December 2016 where the impact of the stress would cause this to change materially. The impacts of these stresses are not linear therefore these results should not be used to interpolate or extrapolate the impact of a smaller or larger stress. The results of these tests are indicative of the market conditions prevailing at the balance sheet date. The results would be different if performed at an alternative reporting date.

Solvency II new business contribution

Management estimates of the value of new business and the margin as at 31^st December 2016 are shown below:

		Contribution from
	PVNBP	new business	Margin %
LGR1(£m)	6,661	693	10.4
UK Protection Total (£m)	1,466	153	10.4
- Individual protection	1,255	139	11.1
- Workplace health and protection	211	14	6.6
US Protection (£m)	631	78	12.4

1.    UK annuity business.

Key assumptions in calculating the Solvency II new business contribution are shown below:

Risk margin			3.1%
Risk free rate
- UK			1.7%
- US			2.1%
Risk discount rate (net of tax)
- UK			4.8%
- US			5.2%
Long term rate of return on non-profit annuities in LGR			3.1%

Demographic assumptions and reserving methodologies have been updated in line with our Solvency II and Economic Capital balance sheets. Other assumptions and methodologies that would have a material impact on the margin for these contracts are unchanged from end 2015 other than the cost of currency hedging which has been updated to reflect current market conditions and hedging activity in light of Solvency II.

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 and our assessment of capital requirements 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, valuation interest rates, expenses and credit defaults. Actual experience may require recalibration of these assumptions impacting profitability. Management estimates are also required in the derivation of Solvency II capital metrics. These include modelling simplifications to reflect that it is not possible to perfectly model the external environment, with adjustment necessitated where new data emerges. Forced changes in reserves can also arise from regulatory or legislative intervention impacting capital requirements and profitability.	We regularly appraise the assumptions underpinning the business that we write. Certain extreme events, however, could require us to adjust our reserves. For example in our annuities business, while recent trend data suggests the rate of longevity improvement may be slowing, we're inherently exposed to the risk that a dramatic advance in medical science beyond that anticipated leads to an unexpected change in life expectancy. This could require adjustment to reserves as improvements in mortality emerged. In our protection businesses, the emergence of new factors with potential to cause widespread mortality/morbidity or significant policy lapse rates may similarly require us to re-evaluate reserves. We undertake significant analysis of the variables associated with writing long-term insurance business to ensure that a suitable premium is charged for the risks we take on, and that reserves continue to remain appropriate for factors including mortality, lapse rates, valuation interest rates, expenses and credit defaults. We remain focused on developing a comprehensive understanding of longevity science and continue to evolve and develop our underwriting capabilities for our protection business. Our use of reinsurance also acts to reduce the impacts of significant variations in life expectancy and mortality.
Investment market performance and conditions in the broader economy may adversely impact earnings, profitability or surplus capital. 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 movements 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. Interest rate expectations leading to falls in the risk free yield curve can also create a greater degree of inherent volatility to be managed in the Solvency II balance sheet, than the underlying economic position would dictate, potentially impacting capital requirements and surplus capital. In addition, significant falls in investment values can reduce fee income to our investment management business.	2016 has seen volatility in financial markets as they have responded to uncertainties in the global economy and political events, such as the UK referendum on membership of the EU. For Legal & General the vote to leave has little direct impact on trading, as our customer base is located very largely in the UK, the US and Asia. It is, however, probable that a potentially lengthy period of negotiation and an uncertain outcome will create ongoing uncertainty for financial markets and the broader UK economy in which we operate; with potential for asset price shifts should uncertainty lead markets to reappraise their value. Potential also exists for renewed financial stress in Europe driven by political events and residual weaknesses in the Euro currency banking systems. Broader geo-political events also have potential to cause shocks to financial markets, with stressed conditions having potential to create illiquidity in bond markets exaggerating the impacts of any significant market correction. 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 in real assets provides both enhanced returns to our 'slow money' and reduces exposure to the volatilities of traded investments.

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 and in extreme scenarios trigger defaults impacting the value of bond portfolios. 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. Under Solvency II, a widespread widening of credit spreads and downgrades can also result in a reduction in our Solvency II balance sheet surplus, despite already setting aside significant capital for credit risk.	A material deterioration in economic conditions inherently increases potential for a widening in credit spreads as financial markets price for increased uncertainty, which in turn may impact our Solvency II balance sheet surplus. Current factors that may trigger a reassessment include the changing global economic outlook with uncertainties following the UK referendum on EU membership and other political events potentially exacerbating down side risks; a renewed banking crisis within the Euro zone area; and default on debt linked to emerging markets. We actively manage our exposure to default risks within our bond portfolios, setting selection criteria and exposure limits, and using the capabilities of LGIM's global credit team to ensure the risks are effectively controlled, and if appropriate trade out to improve credit quality. We also seek to closely manage risks to our Solvency II balance sheet through monitoring factors that could give rise to a heightened level of default risk. However, we can never completely eliminate default risks or their impacts to our Solvency II balance sheet, although we seek to hold a strong balance sheet that we believe to be prudent for a range of adverse scenarios.
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 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 future cash generation.	There remains a significant regulatory change agenda, both from the EU and from within the UK. Current changes in EU driven regulation include GDPR, UCITS V, MIFID II and PRIIPS. While over the longer term, the UK exit from the EU will potentially lead to a re-writing of some legislation, until the UK formally leaves and the UK Government legislates otherwise, EU derived legislation will remain in force. There is also the risk that EU exit negotiation proposals have unintended consequences for the operation of the UK financial services sector. There also continues to be significant change in the tax environment including the global implementation of OECD BEPS recommendations and the prospect of significant US tax reform. With regard to UK regulation, alongside the PRA ensuring the effective operation of Solvency II, the FCA continues to focus on its approach to consumer regulation, with the inherent risk that thematic reviews of historic industry practices lead to unanticipated additional costs. We are supportive of regulation in the markets in which we operate where it ensures trust and confidence and can be a positive force on business. 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. Internally, we evaluate change as part of our formal risk assessment processes, with material matters being considered at the Group Risk Committee and the Group Board. Our internal control framework seeks to ensure ongoing compliance with relevant legislation and regulation. We cannot, however, completely eliminate the risks that controls may fail or that historic accepted practices may be reappraised by regulators, resulting in sanction against the group.
New entrants may disrupt the landscape of the markets in which we operate. As has been seen in 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.	There is already strong competition in all our markets, and although we have had considerable past success at building scale to offer low cost products, we recognise that markets remain attractive to new entrants. We are also cognisant of the potential for entry by scale overseas competitors who may have lower return on capital requirements and be unconstrained by Solvency II. We are executing a digital strategy, using platforms that allow for growth and high scale. Alongside our direct insurance business that enable customers to purchase our protection products on-line, we continue to enhance our online capabilities for auto-enrolment, investment platforms and individual retirement products ensuring focus on customer engagement and the digital experience.
A material failure in our business processes or IT security 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. We are also 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.	Our plans for growth and the digitalisation of our businesses, together with the regulatory change agenda, inherently 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 and external cyber threats. 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. We recognise however, that residual risk will always remain and have designed our risk governance framework to ensure that when adverse events occur we can deploy appropriate responses.

ENQUIRIES

Investors:

Laura Doyle                   Head of Investor Relations                                                                      020 3124 2088

Sujee Rajah                   Investor Relations Manager                                                                    020 3124 2047

Media:

Richard King                  Head of Group Corporate Communications                                               020 3124 2095
Doug Campbell              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/results2017.html.

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/video.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 9927
ALL OTHER LOCATIONS	[phone]

2017 Financial Calendar				Date
Ex-dividend date (final dividend)			27th April 2017
Record date			28th April 2017
Last day for DRIP elections			19th May 2017
Annual general meeting			25th May 2017
Payment date of 2016 final dividend			8th June 2017
Half-year results 2017			9th August 2017

DEFINITIONS

Definitions are included in the Glossary on pages 89 to 92 of this release.

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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