L&G FY 2014 Results Part 1

RNS Number : 4590G

Legal & General Group Plc

04 March 2015

 



LEGAL & GENERAL GROUP PLC PRELIMINARY RESULTS 2014

Stock Exchange Release

04 March 2015

DIVIDENDS UP 21%, ROE UP TO 17%

Financial highlights:

·    NET CASH GENERATION UP 10% TO £1,104M (2013: £1,002M)

·    OPERATIONAL CASH GENERATION UP 6% TO £1,101M (2013: £1,042M)

·    OPERATING PROFIT UP 10% TO £1,275M (2013: £1,158M)

·    PROFIT AFTER TAX UP 9% TO £992M (2013: £906M)

·    EARNINGS PER SHARE UP 10% TO 16.70P (2013: 15.20P)

·    RETURN ON EQUITY 16.9% (2013: 16.1%)

·    FULL YEAR DIVIDEND UP 21% TO 11.25P PER SHARE (2013: 9.30p)

Business highlights:

·    ANNUITY ASSETS UP 28% TO £44.2BN (2013: £34.4BN)

·    LGIM TOTAL ASSETS UP 16% TO £708.5BN (2013: £611.6BN)

·    UK PROTECTION PREMIUM UP 6% TO £1,407M (2013: £1,326M)

·    SAVINGS ASSETS UP 10% TO £124.2BN (2013: £113.4BN)

·    DIRECT INVESTMENTS UP TO £5.7BN (2013: £2.9BN)

Nigel Wilson, Group Chief Executive, said:

"Legal & General delivers economically and socially useful products. Our market leading growth businesses coupled with continuous cost reductions have given us scale and efficiency in our chosen markets. The five global macro trends driving our strategy - ageing populations, globalisation of asset markets, welfare reform, digital connectivity and bank retrenchment - create long term growth opportunities, which we position our businesses to capture. The rapid growth of LGIM's international business to over £100bn, the £5bn of investment in physical assets in the UK, and our entrance into the lifetime mortgage market are all examples of the successful execution of our strategy.

Over the last five years we have increased dividend per share from 3.84p to 11.25p - a nearly threefold increase. In 2014 we produced another year of double digit growth across our key financial metrics enabling us to reward shareholders with a 21% rise in the dividend."

           FINANCIAL SUMMARY

Financial highlights	2014	2013	Growth %
£m
Analysis of operating profit
Legal & General Retirement	428	310	38
Legal & General Investment Management	336	304	11
Legal & General Assurance Society	460	444	4
Legal & General Capital	203	179	13
Legal & General America	56	92	(39)
Operating profit from divisions	1,483	1,329	12
Group debt costs	(142)	(127)	(12)
Group investment projects and expenses	(66)	(44)	(50)
Operating profit	1,275	1,158	10
Investment and other variances (incl. minority interests)	(37)	(14)	(164)
Profit before tax	1,238	1,144	8
Operational cash generation	1,101	1,042	6
New business surplus / (strain)	3	(40)	n/a
Net cash generation	1,104	1,002	10

            LEGAL & GENERAL RETIREMENT (LGR)

£bn	2014	2013	Growth %
Annuity sales	6.6	4.1	61
Internal transfer from with-profits	1.9	-	n/a
Total annuity transactions	8.5	4.1	109
Annuity net inflows	4.4	2.1	110
Annuity assets	44.2	34.4	28

LEGAL & GENERAL INVESTMENT MANAGEMENT (LGIM)

£bn	2014	2013	Growth %
Revenue (£m)	645	594	9
Total net flows	7.6	20.3	(63)
International net flows	8.5	15.8	(46)
LGIM total assets1	708.5	611.6	16

            LEGAL & GENERAL ASSURANCE SOCIETY (LGAS)

£m	2014	2013	Growth %
UK Protection new business annual premiums	230	218	6
UK Protection gross premiums	1,407	1,326	6
General Insurance gross premiums	377	375	1
Savings net flows (£bn)	5.6	6.8	(18)
Savings AUA (£bn)	124.2	113.4	10

            LEGAL & GENERAL CAPITAL (LGC)

£bn	2014	2013	Growth %
Group-wide direct investments	5.7	2.9	98
LGC assets	5.1	4.7	10

LEGAL & GENERAL AMERICA (LGA)

$m	2014	2013	Growth %
LGA new business annual premiums	150	155	(3)
LGA gross premiums	1,117	1,024	9

1.     LGIM total assets includes £499bn (2013: £450bn) of AUM, and £209bn (2013: £162bn) of derivative overlay and GIA advisory assets.  

2014 FINANCIAL HIGHLIGHTS

Legal & General delivered another year of strong growth in operational and net cash generation, operating profit and earnings per share. We continue to grow our business stock, which in turn drives our cash and earnings progression. Annuity assets increased 28% to £44.2bn (2013: £34.4bn), Insurance premiums increased 8% to £3.0bn (2013: £2.8bn) and Savings assets increased 10% to £124.2bn (2013: £113.4bn). LGIM further increased its total assets by 16% to £708.5bn (2013: £611.6bn) and revenue by 9% to £645m (2013: £594m).

Net cash generation increased by 10% to £1,104m (2013: £1,002m). Our new business surplus of £3m (2013: strain of £(40)m) is as a result of a £18m improvement in Annuities new business surplus, a £15m reduction in Savings new business strain and a £10m reduction in Insurance new business strain.

Operational cash generation increased by 6% to £1,101m (2013: £1,042m), driven by a 12% increase in LGR cash, up to £292m (2013: £260m), reflecting the increasing stock of annuity assets, and a 10% increase in LGIM cash, up to £262m (2013: £239m) reflecting its growing stock of assets. Operational cash generation included an additional £15m of debt costs following the issuance of £600m of long dated subordinated Tier 2 debt in June 2014, significantly extending the overall average maturity of the group's borrowings.

Operating profit increased by 10% to £1,275m (2013: £1,158m), reflecting the strong performance of our business.  We have changed our approach to the classification of restructuring costs, reflecting the on-going nature of this type of expenditure. Operating profit in 2014 is stated after £31m of restructuring costs, included within Group investment projects and expenses. 2013 has not been restated and includes £17m in restructuring costs within investment and other variances, below operating profit.

Profit before tax increased 8% to £1,238m (2013: £1,144m) including investment and other variances of £(44)m (2013: £(27)m). We have delivered earnings per share up 10% to 16.70 pence (2013: 15.20 pence) and a higher annualised return on equity of 16.9% (2013: 16.1%).

The Board has confidence in the strength and growth prospects for the business. This underpins the Board's recommendation of a final dividend of 8.35p (2013: 6.90p) giving a full year dividend of 11.25p (2013: 9.30p), 21% higher than 2013. This reflects a net cash cover of 1.65 times. We expect to reduce our net cash coverage of dividend towards 1.5 times in 2015 should our Solvency II surplus be no lower than Solvency I. We will provide updated dividend guidance when Solvency II clarity has fully emerged.

PROGRESSING THE STRATEGY - 2015 AND BEYOND

The Group continues to execute on its clear and focused strategy based on five key macro trends: ageing populations; globalisation of asset markets; welfare reform; digital lifestyles and retrenching banks, through both organic growth and selective bolt-on acquisitions.

Our responses to these trends and the diversification within our business model have enabled us to deliver sustained growth in our cash and earnings. We believe that aligning our strategy to the five macro trends creates a high degree of resilience in our business model, although we do recognise that many external uncertainties remain unresolved. Against this background, we remain selective in our risk appetite, with established capabilities in managing and minimising risk.

Effective and sustainable management of costs remains a key feature of our strategy. We are targetting a c£80m reduction in management expenses and operating costs in 2015 as we continue to drive greater efficiencies through our businesses, as well as responding to the reduced contribution from our mature savings products. We anticipate incurring restructuring costs of c£40m in 2015 to achieve this.

Ageing Populations

The world is getting older and people are living for longer. Individuals generally have not saved enough during their working lives, under-estimating their outgoings in retirement, life expectancy and the cost of care. Pensioners will need to rely increasingly on alternative sources of finance to fund this 'savings gap'. The over 60s in the UK are estimated to have some £1.3 trillion of housing equity and we expect increasing numbers of retirees to use this equity to supplement their retirement income.

Ageing populations at the same time expose corporate balance sheets to earnings volatility caused by predominantly legacy defined benefit pension schemes and the associated financial obligations placed on the sponsoring employer. Globally, the Defined Benefit pension market is in the very early stages of de-risking. It has been estimated that something of the order of $10 trillion worth of liabilities will be de-risked over the next couple of decades.

We have positioned our Investment Management (LGIM) and Retirement (LGR) businesses to respond to the growing demand. LGIM leads the market in liability driven investment (LDI) solutions in the UK, with an estimated market share of over 40% and is delivering good growth in this market in the US. LGR similarly is the market leader in bulk annuity solutions. The bulk annuity market requires a strong and sustained track record, a robust capital base and integrated asset and liability management bringing together different parts of our organisation. Legal & General has all these competitive advantages, built up over 27 years.

In 2014 total LDI assets increased by 26% to £293.3bn (2013: £232.5bn), including net flows of £21.1bn. LGR increased bulk annuity sales to £5,987m (2013: £2,812m). In addition we completed the internal transfer of £1,953m of annuities from with-profits to our shareholder fund in July, which together with individual annuity sales, brings the total volume of annuity business that delivers value to our shareholders, to £8,531m (2013: £4,089m).

OUTLOOK

In LGIM, the clear intention of the majority of companies to de-risk their defined benefit pension schemes is expected to result in strong LDI new business volumes in the UK and US in 2015. This growth is expected, in part, to offset outflows in our UK passive funds which results from this de-risking trend and pension schemes using funds to pay annuitants.  

In LGR, demand for de-risking strategies, including annuity transactions, remains high. Our research indicates that almost two thirds of large defined benefit pension schemes are looking to de-risk. Actual transaction flows of buy-out and buy-in annuity transactions are however dependent on their affordability, which will remain determined on underlying scheme funding levels and prevailing market conditions. Additionally our appetite for bulk annuity transactions and the risks we choose to retain is dependent on the application of Solvency II in the UK.

Our recently announced acquisition of Newlife Home Finance Limited (subject to regulatory

approval), a provider of UK lifetime mortgages, gives us access to this potentially sizeable market. We expect to write over £100m of lifetime mortgages in 2015 and increasing amounts thereafter.

The changes introduced in the March Budget have introduced greater flexibility for individuals in retirement. We expect consumers to demand simple, tax efficient products that allow them to 'cash-out' their pensions and we have tailored our new products accordingly. We expect 2015 sales of Individual Annuities to be around 50% of 2014 new business volumes.

GLOBALISATION OF ASSET MARKETS

Increasingly global asset markets create attractive opportunities to grow and internationalise successful investment management capabilities. LGIM is a trusted, long-standing and increasingly international brand. Following the success of liability driven investment in the UK we are concentrating on expanding our presence in the US market. We recently launched our Index proposition in the US and will seek to capitalise on the efficiency that comes from managing £275bn of index assets globally.

International net inflows were £8.5bn (2013: £15.8bn) as LGIM continued to expand overseas, with sustained growth in LGIM America's LDI and Active Fixed Income products. As a result, total international assets are £128.8bn (2013: £61.2bn), which includes the transfer of c$60.0bn of US business to LGIM's Chicago office and $23.3bn of advisory assets resulting from the acquisition of Global Index Advisors (GIA), both in 2014.

OUTLOOK

Our international business continues to gather momentum, particularly in the US, where we are expanding our distribution capabilities and widening our product offering across LDI, active fixed income and, most recently, index products, with passive funds opening to third party investment in 2015. In the Gulf, we continue to broaden our client relationships and are working to expand our range of mandates. We are also making good progress in Asia, where we are winning mandates in the region and look set to capitalise on these early successes in 2015. Longer term we are creating a global operating model across our London, Chicago and Hong Kong manufacturing hubs to provide enhanced trading and operational capabilities to our increasingly international client base.

WELFARE REFORM

Pressure on public finances is moving the provision of welfare from the state to individuals and employers. This process is already well underway, for example with the introduction of auto-enrolment, which is expected to result in a tripling of DC savings in the UK over the next 10 years. Statutory minimum contribution rates will increase from 2% today to 5% in 2017 and up to 8% in 2018. Longer term, we expect defined contribution savings to be significantly greater than the existing DB assets that we manage. Coupled with this we expect that, as state funding shrinks, the private provision of protection products, both directly with consumers and potentially using the infrastructure of auto-enrolment to employers, will become increasingly important.

Our Workplace business is building the scale to capitalise on this trend, successfully winning c20% of all new members coming to market. The integration of Workplace into LGIM will further strengthen our already strong position, enabling us to continue delivering market-leading capabilities to all our clients.

Our Protection proposition is highly efficient, relying on our digital capabilities that underwrite over 80% of applications at point of sale. We continue to be the market leader of Retail Protection products to both Independent Financial Advisers (IFAs) and in the market in total.

Workplace savings assets increased 28% in the year to £11.1bn (2013: £8.7bn) including net flows of £2.2bn (2013: £1.5bn). Retail Protection wrote over £1bn of premium, driving growth in total UK Protection premiums, up 6% to £1,407m (2013: £1,326m). Group Protection premium increased 4% to £351m (2013: £336m). In the US, our protection business delivered a 9% increase in gross premium, up to $1,117m (2013: $1,024m).

OUTLOOK

In Workplace Savings we anticipate further growth in scale resulting from increased contribution from existing members, new scheme wins as pension schemes reassess their auto-enrolment providers and resulting from our recently launched digital SME offering. Over one million SMEs will need to auto-enrol their employees by October 2018. In 2014 we halved the losses of £29m made in 2013 and the target is for our Workplace business to break-even by the end of 2015.

We expect our UK Retail Protection business to continue to leverage its market leading position although growth is anticipated to be moderate due to the mature nature of this market.

In the US we have introduced price changes which we expect to result in c15% lower new business volumes in 2015 than in 2014. We will take further management action in 2015 if the adverse mortality experience of 2014 is repeated. LGA remains focused on net cash generation.

DIGITAL LIFESTYLES

We are addressing the opportunities and challenges presented by changes in digital customer engagement, investing in digital innovation to deliver the very significant scale and high levels of efficiency required to be successful. We have achieved this with our market leading Retail Protection business, generating over £1bn of premium in 2014, with straight through processing rates at over 80%. We are now challenging ourselves to replicate this success elsewhere in our business, for example, we recently launched a Direct to Consumer (D2C) investment platform and digital proposition in Workplace for SMEs.

UK Protection delivered a £10m reduction in new business strain, reducing to £5m (2013: £15m) reflecting increased levels of efficiency and market leading retail protection premium of £1,056m (2013: £990m). Cofunds assets of £71.9bn (2013: £64.1bn) included retail assets of £37.1bn up 5% (2013: £35.3bn). Our direct general insurance channel has increased premiums by 29% to £88m (2013: £68m) this year, benefitting from enhanced digital capabilities.

OUTLOOK

We are on a multi-year journey to fully position our businesses for these challenges. Progress has been made but further work is needed. In 2015, we need to operationally leverage Cofunds and increase fund flows to LGIM to generate a more meaningful profit contribution to the Group and offset the managed decline in the contribution from mature savings products. Our D2C investment platform is well placed to benefit from increased retail sales and Workplace's SME proposition is expected to generate further growth in defined contribution assets, using digital technology to continue to offer our default auto-enrolment funds at 50bps to smaller companies.

BANK RETRENCHMENT

Bank retrenchment is creating opportunities for annuity providers and other investors with long term investment horizons, such as pension providers and sovereign wealth funds, to invest in real assets. This provides opportunities for greater returns across our Capital (LGC), Retirement (LGR) and Investment Management (LGIM) divisions.

LGC is utilising the Group's capital base to add operational capabilities, such as the acquisition of Banner Homes within CALA (our house builder), and a 40% stake in Pemberton Asset Management (a provider of SME loans across Europe). In addition, we are developing strategic partnerships, including the £370m co-investment with PGGM, the major Dutch pension fund manager, to invest across the UK, managed by Legal & General Property (LGP).

Our approach is providing good access to direct investments and high quality long duration investments for LGR, supporting growth in LGIM and generating enhanced risk adjusted yields on our shareholder capital.

LGC's operating profit increased by 13% to £203m (2013: £179m) and its total assets were £5.1bn (2013: £4.7bn). Direct Investments across the Group increased to £5.7bn (2013: £2.9bn).

OUTLOOK

Our strength in origination and continued development of new asset classes is allowing us to mitigate the downward pressure on returns created by the increased demand for 'packaged' direct investment. In 2015 so far we have consent to build 1,000 new homes on our landbank and a further £200m commitment with joint venture partner Schroders to regenerate Bracknell town centre.

We see increasing opportunities and growing pipeline through 2015 including a €250m investment into European SME loans through our investment in Pemberton Asset Management and building a further £375m portfolio with PGGM to invest in Central London Commercial Property, also to be managed by LGP. In addition, LGC has, in 2015, launched an initial development project in the Private Rented Sector to establish our presence in this growing asset class.

We have also committed £1.5bn to support a £25bn UK regeneration funding vehicle in conjunction with the UK Government's Regeneration Investment Organisation (RIO), which will provide LGIM with additional revenue sources as investment manager of the fund and further access to real assets for LGR.

LEGAL & GENERAL RETIREMENT.

Financial highlights	2014	2013
£m
Operational cash generation	292	260
New business surplus	51	33
Net cash generation	343	293
Experience variances, assumption changes, tax and non-cash movements	85	17
Operating profit	428	310
Bulk annuity sales(£bn)	6.0	2.8
Individual annuity sales (£bn)	0.6	1.3
Internal transfer from with-profits (£bn)	1.9	-
Total annuity transactions (£bn)	8.5	4.1
Longevity insurance gross premiums	333	212
Annuity net inflows (£bn)	4.4	2.1
Bulk annuity assets (£bn)	29.1	21.1
Individual annuity assets (£bn)	15.1	13.3
Total annuity assets (£bn)	44.2	34.4

RECORD PREMIUMS AND INCREASED CASH

Operational cash generation increased 12% to £292m (2013: £260m) reflecting the growth in scale of the business. Net cash generation increased by 17% to £343m (2013: £293m), with new business surplus increasing to £51m (2013: £33m), reflecting our continued ability to source attractively priced assets and effective portfolio strategies to back our new business.

Operating profit increased 38% to £428m (2013: £310m) reflecting this growth, with the stock of annuity assets increasing 28% to £44.2bn (2013: £34.4bn). We continue to benefit from operating through a wide range of distribution channels and being a key player in all the main markets for retirement solutions and pension scheme de-risking.

We continue to see strong demand for our de-risking solutions. Due to their inherent complexity and size of bulk annuity deals, the timing of deal flows will be unevenly distributed between quarterly reporting periods and are susceptible to external market forces.

NEW BUSINESS MARGINS REMAIN STRONG

We continue to see the annuity market as an attractive place to deploy capital and have delivered a strong new business surplus, up 55% to £51m (2013: £33m).

Our numerous competitive advantages built up over nearly three decades, including specialist expertise across longevity, investment management and asset transitioning, coupled with our ability to source new assets to back our annuity business, delivering enhanced risk adjusted returns, enable us to competitively price new business and deliver attractive returns to shareholders.

iNCREASING DEMAND FOR DE-RISKING SOLUTIONS

Bulk Annuity sales more than doubled to £5,987m from 54 policies, (2013: £2,812m, 94 policies). In addition we completed the internal transfer of £1,953m of annuities from with-profits to our shareholder fund in July, bringing the total volume of annuity business that delivers value to our shareholders, to £8,531m (2013: £4,089m).

2014 was a landmark year in the UK pension de-risking market. We completed the two largest bulk annuity transactions in the UK, the £3.0bn buy-in with the ICI Pension Fund and a £2.5bn buy-out with the TRW Pension Scheme. Both demonstrate the strength of our de-risking proposition, with the TRW specifically highlighting our strength in transitioning pension schemes from passive investment strategies to liability driven investments and ultimately to buyout.

We continue to explore opportunities to use our specialist experience and robust capital base in the global de-risking market, particularly in the US.

INDIVIDUAL RETIREMENT - FREEDOM AND CHOICE

Individual Annuity sales were down 54% to £591m (2013: £1,277m) following the 2014 Budget changes and in line with our expectations. We continue to expect the market to remain subdued in 2015, anticipating volumes to be down a further 50% in 2015. We are focussed on maintaining pricing discipline during this period of change.

We believe that Individual Annuities remain a good option for certain consumers, guaranteeing levels of income for life, and will continue to provide these going forward. We continue to innovate and have responded to anticipated changes in consumer demand with new retirement solutions suitable for the post Budget retirement landscape:

·      Lifetime mortgages will be offered to the increasing numbers of customers seeking to use the equity in their homes to supplement their retirement income. In 2014, 21,000 customers across the industry, purchased equity release products, with a total lending value of £1.4bn. In total, an estimated £14bn of equity release transactions has been completed over the last two decades. Our recently announced acquisition (subject to regulatory approval) and funding of Newlife Home Finance Limited fulfils our stated intention to enter this market. 

·      Our "Cash-Out Retirement Plan" provides a simple mechanism by which consumers can access their retirement savings. Consumers can withdraw agreed fixed amounts over a period of their choosing to fund immediate spending requirements or minimise tax over a longer time horizon.

·      Our "Fixed Term Retirement Plan" converts a portion of an individual's retirement savings into contractual payments over a period of their choosing, returning a pre-agreed lump sum amount to the customer at the end of the fixed term.

L&G already offers income drawdown solutions to higher net worth customers through our Suffolk Life subsidiary and will continue to provide these going forward.

LEGAL & GENERAL INVESTMENT MANAGEMENT.

Financial highlights £m	2014	2013
Total revenue	645	594
Total costs	(309)	(290)
Operating profit	336	304
Net cash generation	262	239
Cost:income ratio (%)	48	49
External net flows (£bn)	5.9	20.5
Internal net flows (£bn)	1.7	(0.2)
Total net flows (£bn)	7.6	20.3
of which International (£bn)	8.5	15.8
Assets under management (£bn)	499.1	449.5
Overlay assets1 (£bn)	194.6	162.1
Advisory assets2 (£bn)	14.8	-
Total assets (£bn)	708.5	611.6
International assets under management (£bn)	110.5	59.2
International overlay assets (£bn)	3.5	2.0
Advisory assets (£bn)	14.8	-
Total international assets (£bn)	128.8	61.2

1. Overlay assets, 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.

2. Advisory assets represent the assets on which Global Index Advisors (GIA) provide advisory services.

DIVERSIFIED GROWTH DRIVING CASH AND PROFITS

In a competitive market landscape, LGIM has continued to deliver strong results, with operating profit increasing by 11% to £336m (2013: £304m). With disciplined cost control, the cost to income ratio was 48% (2013: 49%). LGIM continues to invest in its client service proposition and systems infrastructure and is strengthening its distribution capabilities across its increasing client channels.

Total revenues increased 9% to £645m (2013: £594m) as total assets reached £708.5bn at the end of 2014 (2013: £611.6bn). This was driven by strong demand in LDI, Multi Asset, Active Fixed Income and Property asset classes, coupled with positive market returns.

Total net asset flows for the year were £7.6bn (2013: £20.3bn). Our Index net outflows for the year were £16.0bn (2013: net inflows of £0.2bn) largely resulting from the de-risking trend impacting DB passive funds. International net inflows of £8.5bn (2013: £15.8bn) were primarily driven by demand from clients in the US, which resulted in net flows of $9.7bn (2013: $8.4bn) during the year. 

Strong demand for DE-RISKING SOLUTIONS

Asset movements	Index	Solutions & Overlay assets	Active Fixed Income	Active Equities	Property	Advisory assets	Total assets
£bn
As at 1 January 2014	269.8	232.5	89.4	8.6	11.3	-	611.6
Gross inflows	22.8	7.6	5.5	0.1	1.4	-	37.4
Gross outflows	(39.1)	(6.6)	(3.8)	(0.1)	(0.5)	-	(50.1)
Overlay / Advisory net flows	-	18.8	-	-	-	(0.2)	18.6
External net flows	(16.3)	19.8	1.7	-	0.9	(0.2)	5.9
Internal net flows	0.3	1.3	(0.5)	(0.1)	0.7	-	1.7
Total net flows	(16.0)	21.1	1.2	(0.1)	1.6	(0.2)	7.6
Cash management movements	-	-	(1.6)	-	-	-	(1.6)
Acquisition of GIA assets	-	-	-	-	-	13.4	13.4
Market and other mvmts	21.0	39.7	14.8	(0.3)	0.7	1.6	77.5
As at 31 December 2014	274.8	293.3	103.8	8.2	13.6	14.8	708.5

During the year, clients continued to move out of passive equities and transition to LDI strategies, ahead of potential buy-out. LGIM has experienced strong inflows into its LDI and active funds. Total LDI assets, including derivative overlay assets used to help clients manage the risk of meeting their future liabilities, increased a further 26% to £293.3bn (2013: £232.5bn) and are now larger than our total index portfolio. LGIM is the market leader in LDI solutions, with an estimated 44% share of the UK market, and it is extremely well placed to capitalise on the continuing de-risking trend in defined benefit pension schemes.

Legal & General Property (LGP) increased its AUM by 20% to £13.6bn (2013: £11.3bn), driven by strong net inflows of £1.6bn (2013: £0.9bn). LGIM's Property Authorised Investment Fund (PAIF) launched in 2006 has grown to £1.8bn as it continues to see steady inflow of capital from both Retail and Institutional investors. With LGC, LGP has launched two major JVs with PGGM, to invest £745m across the UK. LGIM's property team plays an integral role in the Group's drive to increase Direct Investments on behalf of L&G Retirement and L&G Capital. As one of the most active UK investors in the real estate market, LGP completed over £4.1bn of property transactions in the UK market in 2014, investing approximately £3.4bn and disposing of c £0.7bn.  

GROWTH IN UK DEFINED CONTRIBUTION

UK defined contribution (DC) pension AUM increased 16% to £40.7bn (2013: £35.1bn). Total net inflows of £5.9bn included £2.1bn of net inflows from Legal & General's Workplace Savings platform. From 1st January 2015, Workplace has been transferred from LGAS to LGIM to create a fully integrated customer proposition for UK DC savings customers. The scale and efficiency of LGIM's passive management and asset allocation capabilities, together with the continuing growth in Workplace administered assets, enables us to provide a highly competitive savings proposition, well placed to benefit from longer term UK savings trends. In response to the pension reforms announced in the 2014 budget we have launched a number of new funds and we are continuing to expand and develop our range of multi-asset funds.

CONTINUED INTERNATIONAL EXPANSION

To complement our existing businesses, we have transferred our US index equity funds of c$60bn to LGIM's Chicago office, where they are now managed. As a result of this, the acquisition of GIA, and net flows in the year, international assets grew by 110% to £128.8bn (2013: £61.2bn). In the US, LGIM's Active Fixed Income and LDI proposition continued to grow rapidly with net flows of $9.7bn (2013: $8.4bn). LGIM's continued success in the US has been driven by a combination of strong investment performance, with the majority of composites outperforming their benchmarks over one, three and five years, and a growing need from defined benefit clients for de-risking solutions.

Elsewhere, LGIM continues to make progress in Asia as it invests in resources and infrastructure, winning its first passive client in the region together with additional active fixed income inflows during the year.  

LEGAL & GENERAL ASSURANCE SOCIETY.

Financial highlights	2014	2013
£m
Operational cash generation	472	474
New business strain	(48)	(73)
Net cash generation	424	401
Experience variances, assumption changes, tax and non-cash movements	36	43
Operating profit	460	444

INCREASING SCALE AND EFFICIENCY

Net cash generation increased by 6% to £424m (2013: £401m) reflecting increased scale and efficiency with our Insurance and Savings business increasing their stock of premiums and assets respectively. New business strain of £(48)m (2013: £(73)m) included a £10m improvement in Insurance new business strain and was £15m lower in our Workplace and Mature savings divisions.

LGAS operating profit increased 4% to £460m(2013: £444m). The operating profit of Insurance was £370m (2013: £355m) benefitting from an increased contribution of our market leading Retail Protection business. This was partially offset by lower profits from our General Insurance business following adverse weather experience in Q1 2014, which resulted in additional claims of £12m. The combined operating ratio for GI was 87%. Savings operating profit was £90m (2013: £89m).

Insurance

Financial highlights	2014	2013
£m
UK Insurance new business annual premiums	230	218
Insurance new business strain	(5)	(15)
UK Insurance gross premiums	1,407	1,326
General Insurance gross premiums	377	375
Total UK gross premiums	1,784	1,701

Retail Protection had another exceptional year, with gross premiums up 7% to £1,056m (2013: £990m) and sales up 11% to £165m (2013: £148m). This represents another improvement in our share of the UK retail protection market, reinforcing our strong market leading position.

The business continues to benefit from the strength and breadth of our distribution covering IFAs, where we lead the market and have grown sales by 15% to £99m (2013: £86m) and building societies, where we are the sole provider to societies covering around 85% of UK building society members. The Legal & General Network facilitated £40 billion of mortgages in the year, approximately 1 in 6 of all UK mortgages. Our direct channel continues to grow, with sales increasing 34%, now accounting for 16% of new business (2013: 13%).

Group Protection delivered a 4% increase in gross premiums to £351m (2013: £336m) with new business sales marginally down on 2013 at £65m (2013: £70m) following some price increases we implemented in 2014.

UK Insurance new business strain reduced to £5m (2013: £15m), benefiting from higher sales and further operational efficiency.   

General Insurance gross premiums increased marginally to £377m (2013: £375m) with direct to consumer premiums increasing 29% to £88m (2013: £68m). Operating profit of £59m (2013: £69m) resulted from a strong combined operating ratio of 87% (2013: 84%) and included a £12m impact of the adverse weather experienced at the start of the year.

SAVINGS

Asset movements	Platforms1	Workplace	Suffolk Life	Mature Savings	Overseas	Consol. Adj	Total LGAS
£bn
As at 1 January 2014	64.1	8.7	6.6	36.3	4.5	(6.8)	113.4
Gross inflows	10.1	2.8	1.3	1.4	0.4	(0.5)	15.5
Gross outflows	(4.7)	(0.6)	(0.5)	(4.4)	(0.4)	0.7	(9.9)
Net flows	5.4	2.2	0.8	(3.0)	-	0.2	5.6
Market movements	2.4	0.2	0.3	2.7	(0.1)	(0.3)	5.2
As at 31 December 2014	71.9	11.1	7.7	36.0	4.4	(6.9)	124.2

1. Platforms include Cofunds and Investor Portfolio Services (IPS). 

Savings assets increased 10% in the year to £124.2bn (2013: £113.4bn) as the strategy of developing highly scaleable and efficient platforms continues to deliver strong growth. Savings operating profit increased marginally to £90m (2013: £89m) with reduced contribution from our mature savings business being offset by better performance in our workplace business as it continues to increase in scale.

Our platform business delivered net flows of £5.4bn (2013: £7.9bn) as assets under administration increased 12% to £71.9bn (2013: £64.1bn). Cofunds continues to lead the market, with a 21% share of the platform market and positive flows across all channels (institutional, retail and bancassurance). The integration of Cofunds is on track. We have delivered annualised cost savings of £7m per annum at the end of 2014 and continue to target £11m per annum by the end of 2015.

The retail savings market is expected to benefit from the greater flexibility in pensions savings, as introduced in the recent budgetary reforms which, coupled with higher ISA limits, is expected to increase retail savings levels. We continue to enhance our existing functionality and improve our operational efficiency to deliver high quality, low cost savings products to existing and potential customers to capitalise on these trends.

Legal & General has recently launched its Direct to Consumer ('D2C') solutions, expanding our non-advised services to intermediaries in February 2015 by providing a cost effective digital solution directly to their consumers and offering a D2C service for ISA purchases via the Legal & General website.

In Workplace, assets have increased 28% to £11.1bn (2013: £8.7bn) with 1.2 million employees and 2,287 schemes now on the platform. This represents a further 325,000 customers and over 500 new schemes added since the end of 2013.

The increasing scale of Workplace has resulted in a halving of the operating losses experienced in 2013 to £15m in 2014. Our proposition continues to benefit from incremental enrolment into pre-existing schemes and new schemes, where we have a market share of c20% of new members being enrolled.

The defined contribution market, with the expected tripling of DC savings in the UK over the next 10 years, provides a significant opportunity to the Group. We continue to offer our default auto-enrolment funds at 50bps, below the 75bps cap recently prescribed and our recently announced SME solution, with no up-front charges, will target smaller schemes with a highly digitalised solution.

The continued growth in administered assets and increasing efficiency, including a 60% reduction in unit costs over the last three years, means that we are targetting to break-even in Workplace by the end of 2015.

Our SIPP business, Suffolk Life, delivered net inflows of £0.8bn (2013: £0.9bn). As a result the assets of Suffolk Life have increased 17% in the period to £7.7bn (2013: £6.6bn).

In Mature Savings assets were £36.0bn (2013: £36.3bn). Net outflows of £(3.0)bn (2013: £(3.7)bn) were in-line with our expectations and partially offset by positive market movements of £2.7bn (2013: £3.8bn).

LEGAL & GENERAL CAPITAL.

POSITIVE CONTRIBUTION TO CASH AND PROFITS

Financial highlights	2014	2013
£m
Operating profit	203	179
Operational cash generation	162	137

Legal & General Capital (LGC) increased operating profits by 13% to £203m (2013: £179m) representing the smoothed expected return on LGC assets after expenses, and equates to an assumed annualised investment return of 4.3% (2013: 4.1%) on an average asset base of £4.8bn (2013: £4.5bn).  LGC assets increased by 10% to £5.1bn at the end of 2014 (2013: £4.7bn). Actual investment return was 3.5% (2013: 4.4%).

LGC is building an asset base to support the expansion of earnings, both within LGC and the other divisions. The key objectives are to:

(1) Increase risk adjusted returns on our regulatory solvency margin and surplus shareholder assets.

(2) Providing better access to assets to back our annuity liabilities in LGR. As an example, LGC acquired a £518m long-lease portfolio in the first half of 2014, which were syndicated to LGR and LGC, providing LGR with £326m of attractively priced assets.

(3) Buying additional operational capabilities and developing strategic partnerships to ensure good access to direct investments and generate better returns over the medium to longer term. LGC acquired a 40% stake in Pemberton Asset Management, with a commitment to invest €250m into SME loans across LGR and LGAS, developing a European Private Placement capability. We also invested alongside PGGM in a £370m UK Commercial Property portfolio where LGIM are the asset manager.

(4) Supporting Legal & General's social purpose agenda. LGC are focused on housing, urban regeneration, energy and alternative finance, where long term capital is failing to meet the demand.

£2.8BN FURTHER DIRECT INVESTMENTS COMPLETED

Direct Investments	2014	2013
£bn
LGR	4.6	2.5
LGC	0.7	0.3
LGA & Other	0.4	0.1
Total	5.7	2.9

LGR continues to invest in longer term property leases, commercial mortgages and infrastructure. In the year this included £845m of additional property investments including the £252m Places for People deal to acquire 4,000 homes and to help finance 7,000 new homes over 7 years. In addition, a further £593m of secured lending and £260m of infrastructure investment were completed during the year.

LGC continues to invest in direct investments;LGC purchased a 40% stake in Pemberton, and provided a £77m cash injection into CALA to acquire Banner Homes. We increased the allocation into UK commercial property with strategic co-investments and provided £143m of short term loans to strategic partners to facilitate direct investments.

LGA has invested in commercial mortgages and US private placements including $544m private placements and USD Commercial Real Estate Lending.

RESILIENT GROUP-WIDE INVESTMENT STRATEGY

The Group's principal balance sheet of £57.2bn is well positioned for the medium term and is predominantly an Investment Grade debt portfolio with low bank sub-debt and peripheral European exposure, and, where applicable, is closely hedged to liabilities.

Asset portfolio	2014
£bn	LGR1	LGC	Other	Total
Bonds:	40.7	1.6	3.5	45.8
Sovereigns	7.8	0.2	1.2	9.2
Banks	2.3	0.4	0.2	2.9
Other bonds	30.6	1.0	2.1	33.7
Property	1.9	0.1	-	2.0
Equities	0.3	1.9	0.1	2.3
Derivatives	3.8	0.1	0.1	4.0
Cash, cash equivalents, loans & receivables	0.7	1.4	0.9	3.0
Total financial investments	47.4	5.1	4.6	57.1
Other assets	0.1	-	-	0.1
Total investments	47.5	5.1	4.6	57.2

1. LGR assets represent those used to back the Group's non-profit annuity business.

The investment variance across the Group was £(8)m (2013: £29m) reflecting the positive impact of changes in LGR's investment portfolio, with greater levels of direct investment, offset by equity returns in the LGC asset portfolio which were materially lower in 2014 than our medium term assumptions.

LEGAL & GENERAL AMERICA.

Financial highlights	2014	2013
$m
Operating profit	93	145
Operational cash generation	76	69
Gross premium income	1,117	1,024
New business APE	150	155

INCREASED CONTRIBUTION TO CASH

Operational cash generation increased by 10% to $76m (2013: $69m). This represents the dividends paid by LGA to the Group and reflects the focus of LGA to deliver net cash generation. In 2015 LGA has already paid an ordinary dividend of $80m to the Group.

During 2014, LGA adjusted its new business pricing basis, allowing 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 resulted in lower new business volumes of $150m (2013: $155m) over the full year, including a decline of $13m (15%) in the second half of 2014 compared to the corresponding period in 2013. New business margin decreased to 9.9% (2013: 11.6%) with the benefits from this change in business mix being more than offset by changes to longer term mortality and lapse assumptions.

Gross premiums increased 9% to $1,117m (2013: $1,024m) as we continue to benefit from strong relationships with the brokerage general agents, who distribute term assurance in the US market. LGA is the 3^rd largest provider of term life assurance by sum assured in the US and remains the largest provider through the key distribution channel of BGAs. LGA now has 1.15 million customers (2013: 1.04 million).

profit impacted by adverse mortality

Operating profit was significantly lower at $93m (2013: $145m) as LGA incurred total mortality claims which were $46m higher than assumptions. Mortality experience was generally unfavourable across the US life industry in 2014, especially in Q1 and Q4. The lower interest rate environment in the US also had an adverse impact on LGA's profitability of around $10m year on year. We will continue to closely monitor emerging mortality experience in 2015 and take further management action, including pricing adjustments, as required.

cash generation.

STRONG CORRELATION BETWEEN CASH GENERATION AND EARNINGS

The table below highlights the linkage between the operational and net cash generation of the business, and the profit of the Group.

£m	Op cash	Strain	Net cash	Variances and other	Profit after tax	Tax	Profit before tax
LGR	292	51	343	3	346	82	428
LGIM	262	-	262	-	262	74	336
LGAS	472	(48)	424	(63)	361	99	460
LGC	162	-	162	-	162	41	203
LGA	46	-	46	(14)	32	24	56
Operating profit from divisions	1,234	3	1,237	(74)	1,163	320	1,483
Group debt and other costs	(133)	-	(133)	(32)	(165)	(43)	(208)
Operating profit	1,101	3	1,104	(106)	998	277	1,275
Investment and other variances	-	-	-	(6)	(6)	(31)	(37)
Total	1,101	3	1,104	(112)	992	246	1,238
Dividend			668		668
Dividend coverage			1.65		1.49

CASH GENERATION BACKED BY DIVIDENDS TO GROUP

In 2014, 86% of the net cash generation was distributed to the Group (2013: 88%).  This demonstrates the high quality, liquid nature of the cash generation.

	2014			2013
£m	Net cash £m	Dividend £m	Dividend % of cash	Net cash £m	Dividend £m	Dividend % of cash
LGR, LGAS and LGC	929	685	74	831	627	75
LGIM	262	213	81	239	213	89
LGA	46	46	100	44	44	100
Sub-total	1,237	947	76	1,114	884	79
Group debt and other costs	(133)			(112)	-
Total	1,104	944	86	1,002	884	88

OPERATIONAL CASH GENERATION GUIDANCE

	2015	2014
£m	Guidance
LGR	340	292
Insurance excluding General Insurance	290	286
Savings1	135	127
LGA2	50	46
LGC	170	162
Sub-total	985	913
LGIM		275
LGAS General Insurance		46
Operational cash generation from divisions		1,234
Group debt costs	(116)	(112)
Other costs		(21)
Total operational cash generation		1,101
New business surplus		3
Net cash generation		1,104

1. Workplace savings is excluded from Savings operational cash and cash guidance, and included within LGIM operational cash.            

2. LGA has already paid its 2015 ordinary dividend of $80m in February 2015.

For LGR, LGA, LGC, Savings, Insurance excluding General Insurance and Group debt costs, we estimate operational cash generation will increase in 2015 by 8% to £869m (2013: £801m). 

TAXATION.

GROUP TAX RATES - EFFECTIVE TAX RATE OF 19.9%

Equity holders' effective tax rate	2014	2013
%
Total Effective Tax Rate	19.9	20.8
Annualised rate of UK corporation tax	21.5	23.25

In 2014, 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 £45m in respect of trading losses carried forward in Group companies (2013: £93m).  The movement in the year includes a £71m (2013: £70m) contribution to net cash generation in LGR and LGAS Protection from the utilisation of tax losses.  It is expected that the trading losses within LGR will be fully utilised during 2015.

BALANCE SHEET STRENGTH.

EXTENDING THE DEBT MATURITY OF THE GROUP

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 £3.0bn (2013: £2.5bn). There is also a further £0.7bn (2013: £0.7bn) of operational borrowings including £0.7bn (2013: £0.6bn) of non recourse borrowings. In June 2014 we issued £600m of subordinated Tier 2 debt, with a maturity date of 2064 (with an initial call date of 2044), and coupon rate of 5.5% and extended the overall average maturity of the group's borrowings significantly.

Group debt costs of £142m (2013: £127m) reflect an average cost of debt of 5.2% per annum (2013: 4.9% per annum) on average nominal value of debt balances of £2.7bn (2013: £2.6bn).

IGD Capital resources

As at 31 December 2014 the Insurance Group's Directive (IGD) surplus was £3.9bn (2013: £4.0bn).

The Group's capital resources totalled £7.7bn, covering the capital resources requirement of £3.8bn by 2.01 times.

Capital resources increased by £0.4bn, primarily as a result of net cash generation of £1.1bn and the issuance of £0.6bn of additional Lower Tier 2 debt in June, offset by £(0.7)bn of dividends, including allowance for the final dividend of £496m (2013: final dividend of £408m) and £(0.2)bn of additional provision for pension deficit payments during the year.

The Group's capital requirement increased by £0.5bn primarily as a result of an additional £0.4bn deployed in writing new business, offset by £(0.2)bn released from the run-off of existing business. The Group's capital surplus was impacted by a further £(0.3)bn resulting from sensitivity to asset market movements. In LGPL, the Group's main annuity company, we maintain a provision of £2.3bn (2013: £1.8bn) to provide for the risk of credit default. Over the last five years we have experienced total actual defaults of less than £10m.

Capital	2014	2013
£bn
Group capital resources	7.7	7.3
Group capital resources requirement	3.8	3.3
IGD surplus	3.9	4.0
Coverage ratio (%)	201	221

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. These numbers do not represent our view of the Solvency II outcome for the Group.  Solvency II has elements which L&G considers to be inconsistent with the Group's definition of economic capital, so there will be differences between the two balance sheets. Our Economic Capital model has not been reviewed by the Prudential Regulatory Authority (PRA), nor will it be.

As at 31 December 2014 Legal & General Group had an economic capital surplus of £7.0bn (2013: £6.9bn), corresponding to an economic capital coverage ratio of 229% (2013: 251%).

Eligible own funds increased by £1.1bn to £12.5bn (2013: £11.4bn) primarily as a result of own funds generated by new business written, releases on the back book and the issuance of £0.6bn of debt, offset by dividends.

The economic capital requirement increased by £1.0bn to £5.5bn (2013: £4.5bn) primarily as a result of changes in market conditions, increases in surplus assets which attract risk capital and the capital requirements on new business written. Overall the new business written in 2014 has covered its capital requirements.

Capital	2014	2013
£bn
Eligible own funds	12.5	11.4
Economic capital requirement	5.5	4.5
Economic capital surplus	7.0	6.9
1-in-200 coverage ratio (%)	229	251

Supplementary EEV disclosure.

EEV highlights	2014	2013
Pence
Equity per share including LGIM	212	190
Equity per share	185	162

Analysis of EEV results	2014	2013
£m
Contribution from new business	850	651
Intra-group transfer of annuities from With-Profit to Non-Profit Fund	100	-
Expected return from in-force business	490	426
Experience variances and assumption changes	(185)	(32)
Development costs	(32)	(40)
Contribution from shareholder net worth	194	125
EEV operating profit on covered business	1,417	1,130
Business reported on an IFRS basis	164	211
EEV operating profit	1,581	1,341
Economic variances	790	215
Losses attributable to non-controlling interests	7	13
EEV profit before tax	2,378	1,569
Tax and other	(362)	(270)
EEV profit after tax	2,016	1,299

EEV PER SHARE

The Group delivered £2,016m of EEV profit after tax, which after external dividend payments in the year of £580m and foreign exchange, pension deficit and other adjustments of £(45)m, increased EEV shareholders' equity to £10,975m (2013: £9,586m), equivalent to 185p per share (2013: 162p per share). Including LGIM's external funds in the calculation increases the EEV per share to 212p (2013: 190p).

NEW BUSINESS CONTRIBUTION

Contribution from new business increased to £850m (2013: £651m). The increase reflects the strong increase in the contribution from Legal & General Retirement, where sales increased to £6.6bn (2013: £4.1bn), excluding the internal transfer of annuities from with-profits to our shareholder fund in July.

Worldwide EEV new business margin increased to 5.8% (2013: 5.1%) primarily due to the higher mix and improved margin of our annuity business.

EEV OPERATING PROFIT

EEV operating profit increased by 18% to £1,581m (2013: £1,341m), as the Group benefited from its growth strategy and higher sales. Experience variances and assumption changes were £(185)m (2013: £(32)m) with positive experience and assumption changes in LGAS and LGR being more than offset by negative operating assumption changes in LGA of £(241)m. LGA has adjusted its mortality embedded value assumptions to reflect the potential impact of industry wide mortality tables issued for consultation in the second half of 2014.

Operating profit also benefited from strong results in Investment Management and General Insurance which are largely reported on an IFRS basis within the EEV operating profit.

ECONOMIC VARIANCES

Positive economic variances of £790m (2013: £215m) arose from a number of factors including gains of £0.8bn resulting from a reduction in the UK risk discount rate to 5.5% (2013: 6.8%) and £0.2bn arising from equity market gains, offset by £(0.4)bn resulting from the reduction in the UK risk free rate to 2.2% (2013: 3.4%) impacting expected longer-term investment returns.

VALUE OF IN-FORCE

The table below illustrates how the discounted and undiscounted value of in-force (VIF) has increased throughout the year.

Reconciliation of LGAS and LGR VIF	Discounted	Undiscounted1
£bn
Opening VIF at 1 January 2014	4.9	10.5
Contribution from new business	0.6	1.4
Intragroup transfer from with-profit to non-profit fund	0.1	0.2
Unwind of discount rate	0.3	n/a
Expected release from non profit and with-profits businesses2	(0.7)	(0.8)
Experience variances / assumption changes	-	0.2
Investment variance / economic assumption changes	0.9	0.6
Other	0.2	-
Closing VIF at 31 December 2014	6.3	12.1

1. Management estimates.            

2. Comprises the expected release from non-profit business of £645m and with-profits transfer of £43m.

ADDITIONAL VALUE OF LGIM

Within the calculation of Group embedded value, LGIM profits on internally sourced business are included on a look through basis at £0.4bn (2013: £0.3bn), equivalent to 6p per share (2013: 5p per share).

The external assets component of LGIM is included at the IFRS net asset value of £0.5bn (2013: £0.4bn), equivalent to 8p per share (2013: 7p per share).

Including the external assets component of LGIM on an embedded value basis would increase the contribution of LGIM to the Group embedded value from £0.9bn (14p per share) to £2.5bn (41p per share). In line with the rest of the Group, the embedded value for LGIM excludes any value for future new business.

Estimated LGIM discounted cash flow valuation	2014	2014
	p per share	£bn
Look through value of profits on covered business	6	0.4
Net asset value	8	0.5
Current value of LGIM in Group embedded value	14	0.9
LGIM VIF	27	1.6
Alternative discounted value of LGIM future cash flows	41	2.5

Including LGIM, this scenario equates to an indicative valuation per share of 212p (2013: 190p).

Indicative valuation including LGIM	2014	2014
	p per share	£bn
EEV as reported	185	11.0
LGIM VIF	27	1.6
Total including LGIM	212	12.6

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 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. 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. 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.		trend, outlook and MITIGATION 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. As illustrated by the implementation of the EU gender neutral pricing legislation, 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. We seek to ensure that legislators understand the benefits to consumers of pricing insurance products based on the risk factors that each policy presents.
In dealing with issuers of debt and other types of counterparty the Group is exposed to the risk of financial loss. A systematic default event within the  corporate sector, or a major sovereign debt event, could result in dislocation of bond markets, significantly widening credit spreads, 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.		Whilst global investment markets have returned to pre-financial crisis levels, in the current environment there is limited resilience in financial markets for shocks; with potential for significant falls in asset values should markets reassess returns. Factors that may result in shocks include a deterioration in geo-political stability for example as a consequence of tensions in Eastern Europe and the  Middle East; an abrupt change in the  monetary policies of the leading economies; or a further crisis in the  Euro zone. Financial markets may also reappraise asset valuations as a result of changes in the outlook for the global economy including for example, a projected period of low or negative growth amongst leading economies or a period of prolonged deflation, and in response to outcomes from elections in the UK, Europe and the US. We model our business plans across a broad range of economic scenarios and take account of alternative economic outlooks within our overall business strategy. As part of our business plans we have sought to ensure focus upon those market segments that we expect to be resilient in projected conditions.
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 and distribution of our products; and the prudential capital that we hold. Significant changes in legislation or regulation may reduce our future revenues and 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.		Recent years have seen a narrowing of credit spreads reflecting market confidence in the issuers of investment grade bonds, and at Legal & General we have continued to experience low levels of default on our corporate bond portfolio. There remains, however, a range of factors that could trigger defaults by the issuers of debt, leading to reduced profitability or financial loss. These include a Sovereign debt event or a banking crisis developing, for example in emerging markets. 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 hold reserves against our assessment of counterparty debt defaults. We continue to diversify the asset classes backing our annuities business, to include the use of property lending, sale and leaseback and other forms of direct investment.
As a UK based Group, our earnings are influenced by the performance and perception of the UK financial services sector as a whole. The financial crisis, subsequent investment performance and low interest rate environment, together with regulatory actions in the sector, may impact consumer attitudes to long-term savings and insurance products. Regulatory actions may also lead to changes to the regulatory and legislative environment in which we operate.		The regulatory landscape continues to evolve. The Solvency II capital regime is to be implemented by the PRA on 1 January 2016; the FCA is continuing to develop its approach to consumer regulation; and we continue to see new regulation emerging from the EU. More broadly, as illustrated in the 2014 budget announcement, the sectors in which we operate remain inherently exposed to sudden changes in legislation and regulation. With regard to Solvency II, the capital that we will be required to hold will not be certain until PRA agreement of our internal model, with the risk that the final outcome results in a lower capital surplus than under Solvency I. There are also challenges in ensuring that regulatory interpretation of the new rules is proportionate and cost effective for the insurance sector. In terms of consumer regulation, there remains a need for greater regulatory certainty to providing consumer guidance and addressing the advice gap in a post Retail Distribution Review and an increasingly digital world. We remain 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. 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. We maintain a flexible distribution model to respond to changing market trends.
The Group may not maximise opportunities from structural and other changes within the financial services sector, adversely impacting future earnings. Significant changes in the markets in which we operate may require the review and realignment of elements of our business strategy. A failure to be sufficiently responsive to potential change and understand the implication to our businesses, or the incorrect execution of change may impact the achievement of our strategic objectives.		As a significant participant in the long-term savings and insurance markets, we are exposed to changes in consumer sentiment. We are also exposed to increased costs of regulatory compliance through regulatory and legislative responses to events in the financial services sector. Recent examples include requirements for central clearing of certain derivative instruments, which would increase the costs associated with pension savings products and annuities, respectively. We actively manage our brand and seek to differentiate our business model from that of our competitors, focusing on our customers' needs through a diversified portfolio of risk, savings and investment businesses. We also actively engage with our  regulators to support understanding of the  risk drivers in the  markets in which we operate, and highlight matters where we believe the  industry needs to change.
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.		Macro trends in the markets in which we operate remain those of an ageing population; reform in the provision of state welfare; retrenchment by the banks; the globalisation of asset markets; and the increasing use of digital technologies. Responding to these trends potentially creates people and change risks, such as organisational challenges and management stretch across the range of initiatives. Regulatory changes and political risks may also present complexity in delivering our responses. We've defined clear strategies to respond to the macro trends. We monitor as part of our on-going risk review processes factors that may impact our responses to these macro trends and seek to ensure appropriate risk mitigation plans are put in place.
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 on-line 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.		Our plans for growth 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 "three lines of defence" 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.
		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 response to emerging threats; however, the evolving nature of cyber threats means that residual risks will remain.

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 9:30 GMT today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of the presentation which can be accessed at http://investor.legalandgeneral.com/results.cfm. 

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
All other locations	+ 44 20 3059 8125
Conference Entry via QR Code	To gain access to the conference using the QR code, please ensure you have the appropriate software on your mobile device and scan the image.

Financial Calendar	Date
Ex-dividend date	23 April 2015
Record date	24 April 2015
Annual general meeting	21 May 2015
Payment date of 2014 final dividend	4 June 2015
Q1 Interim Management Statement 2015	6 May 2015
Half-year results 2015	5 August 2015
Q3 Interim Management Statement 2015	4 November 2015

DEFINITIONS

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

Net cash generation is defined as operational cash generation less new business strain.

Annualised return on equity is calculated by taking annualised profit after tax attributable to equity holders of the Company as a percentage of the average shareholders' capital employed, being an average of the opening and closing shareholders' equity during the period.

The Group's principal balance sheet includes those assets to which shareholders are exposed, excluding assets where our customers have the total market risk and reward.

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.

 

END

 

 

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