Replacement: Half Year Result

RNS Number : 4990Q

Legal & General Group Plc

04 August 2010

 

Replacement: In the headline, the text should read Legal & General delivers 34% growth in IFRS operating profit to £542m NOT £524m

Stock Exchange Release

4 August 2010

For immediate release

Legal & General delivers 34% growth in IFRS operating profit to £542m, generates £358m net cash and increases half year dividend by 20%

·          IFRS operating Profit up 34% at £542m (H1 2009: £404m)

·          IFRS Pre tax profits improved by £680m to £537m (H1 2009: £(143)m)

·          net cash generation¹ up 19% at £358m (H1 2009: £302m)

·          HALF YEAR dividend Up by 20% to 1.33p per share (h1 2009: 1.11P PER SHARE)

·          EEV per share up 4% at 119p (31/12/09: 114P)

·          worldwide new business up 18% to £881m APE² (H1 2009: £746m).  LGIM NEW BUSINESS UP 49% to £21.2 bn (H1 2009: £14.2bn)

·          IGD surplus³ up to £3.3bn (31/12/2009: £3.1bn)

Tim Breedon, Group Chief Executive, said:

"We are successfully executing our strategy to deliver healthy returns on capital and focus on cash generation.  In the first half, we have delivered £358m against our £600m net cash generation target for the year.  Reflecting the continuing combination of healthy net cash generation and a strong capital surplus, we have increased the half year dividend by 20% to 1.33p per share.

"The outlook for our markets in the second half of 2010 and into 2011 continues to be mixed.  We are optimistic about growth prospects in UK savings and annuities, though there is little evidence of recovery in the UK housing market.  We continue to see opportunities to export our investment management and bancassurance franchises into international markets.

"At the end of June the Group had £3.3bn of capital in excess of our current regulatory capital requirements³.  This means we are ideally placed to respond to current market and economic uncertainty and to take advantage of the significant opportunities for growth that are emerging from the changing landscape for financial services post credit crisis."

Financial Highlights £m	H1 2010	H1 2009
IFRS operating profit	542	404
IFRS profit/(loss) from ordinary activities after tax	401	(91)
Net cash2	358	302
IFRS diluted earnings per share (pence)	6.66	5.21
Final dividend per share (pence)	1.33	1.11

1.  Net cash generation includes the operational cash generated less new business strain for the UK non profit Risk and Savings businesses, plus the shareholders' share of bonuses on With-profits business, the post-tax IFRS operating profit of LGIM and other UK businesses, the expected investment return (excluding expected gains/losses on equities) on Group capital and financing invested assets and dividends remitted from International businesses.

2.  Annual Premium Equivalent.

3   Estimated unaudited Insurance Group Directive (IGD) surplus after accrual of the interim dividend of £78m (H109: £65m).

Key Performance Indicators

IFRS - operating profit up 34% to £542m

£m	Risk	Savings	Inv Mmgt	International	Group capital & financing	Group Projects	H1 2010	H1 2009
Operational cash generation	212	72	70	33	15	-	402	333
New business strain	(10)	(34)	-	-	-	-	(44)	(31)
Net cash generation	202	38	70	33	15	-	358	-
H1 2009 Net cash generation	229	(4)	54	-	23	-	-	302
IFRS Operating profit	310	54	98	61	33	(14)	542
IFRS Operating profit H1 2009	223	17	74	65	25	-		402
Number of shares - diluted (m)							5,890	5,830
Diluted earnings per share (pence)							6.66	5.21
Half year dividend per share (pence)							1.33	1.11

Balance Sheet - £320bn in LGIM, £56bn in Savings, £24bn in Annuities

£bn	H1 2010	H1 2009
LGIM funds under management	320	271
Savings assets under administration	56	46
Annuities non profit assets	24	22

Capital - IGD surplus £3.3bn

£bn	H1 2010	H1 2009
IGD surplus2	3.3	1.9
Coverage ratio %	222	179
Total credit default provision	1.5	1.3

EEV- embedded value per share 119p

£m	H1 2010	H1 2009
Worldwide PVNBP3	3,880	4,366
Worldwide new business margin %	4.1	4.5
EEV operating profit	589	656
Number of shares - year end (m)	5,866	5,862
Shareholders' equity	6,958	5,556
Equity per share (pence)	118.6	94.8

1. Includes Annuities and some Savings assets.

2. Estimated unaudited IGD surplus after accrual of the half year dividend of £78 million (H109: £65m).

3. Present value of new business premiums.

Group Results

Summary IFRS income statement £m	H1 2010	H1 2009 restated
Risk	310	223
Savings	54	17
Investment Management	98	74
International	61	65
Group capital and financing	33	25
Group projects	(14)	-
Operating profit	542	404
Variation from longer term investment return	(4)	(527)
Property losses attributable to minority interests	(1)	(20)
Profit/(loss) from ordinary activities before tax	537	(143)

IFRS operating profit up 34% to £542m

The Risk division made further progress increasing IFRS operating profit by 39% to £310m (H109: £223m) and operational cash generation was broadly flat at £212m (H109: £216m).  The General Insurance business delivered a £14m profit contribution (H109: £6m).

LGIM continued to deliver impressive results.  Half year IFRS operating profit of £98m was 32% up on prior year (H109: £74m).  New business flows into our range of core investment products for UK corporate pension schemes were strong, as was demand for our active fixed income and liability driven investments (LDI) funds. 

The transformation of the Savings business continued in the first half of 2010.  IFRS operating profits of £54m (H109: £17m) trebled and net cash increased to £38m (H109: (£4)m).  Our strategy of focusing on high quality, capital efficient products, backed by a low cost infrastructure, is succeeding.  We have made material progress in transforming Savings into a modern, high quality, profitable business.

International delivered £61m of IFRS operating profit in the first half (H109: £65m).  Operational cash generation was increased to £33m (H109: £nil) following the receipt of a dividend from the US business in March.  We expect the US business to remit cash to Group on a regular basis going forward.

Below operating profit, the variation from longer term investment return was negative £4m from negative £527m last year.  After allowing for the payment of £78m of dividends in the period, shareholders' equity increased by 7% to £4.5bn (FY09: £4.2bn) equating to 76.2 pence per share (2009: 71.6 pence per share).

Net cash up 19% to £358m

In the first half of 2010, the Group increased operational cash generation by 21% to £402m (H109: £333m).  Investment in new business totalled £44m.  Attractive pricing conditions in annuities remained a feature of the market in H110.  Consequently, annuity new business strain was positive £35m in H110 (H109: positive £71m). Protection volumes were marginally down by 6% in the period, which, coupled with cost efficiencies, led to a fall in protection new business strain to £45m (H109: £58m).  Savings new business strain of £34m was 23% down on the same period last year as we continue to reap benefits from our strategy of selling capital light, modern savings products.  Net cash generation was up 19% at £358m for the period (H109: £302m). 

We remain on track to generate at least £600m of net cash in 2010.

Half Year dividend increased by 20% to 1.33 pence per share

The strength of the Group's cash flow and the prospects for continued growth in net cash generation underpinned the Board's decision to increase the half year dividend by 20% to 1.33 pence per share at a cost of £78m (2009 Half year: £65m).  The Board remains confident in our ability to continue to generate healthy and growing net cash and we intend to grow future dividends reflecting the strong net cash generation of the Group.  We expect the full year dividend to continue to be 2 to 3 times covered by net cash and aim to return to paying around one third of the full year dividend at the interim stage over time. 

Balance Sheet and Capital - IGD coverage ratio 222%

The Group maintains and benefits from a strong balance sheet.  The estimated IGD surplus at 30 June 2010 of £3.3bn after the accrual of the half year dividend of £78m (31.12.09: £3.1bn after the accrual of the final dividend of £160m).

Worldwide assets under management of £331bn were broadly in line with the end of 2009 despite a fall in the FTSE 100 of 9 per cent over the period.  Of this, shareholders have direct exposure to £33bn (10%) of worldwide assets and included within this are the assets held to back the UK non profit annuity business in Legal & General Pensions Limited, which are primarily invested in fixed interest securities. 

The asset portfolio backing the annuity business remains of high quality and no default cost was experienced in the first half of 2010.  Despite this, continued market volatility and the inclusion of a default provision applied to a significant proportion of new business written in the period have resulted in the total credit default provision remaining unchanged from year end 2009 at £1.5bn.  This represents 67bps (31.12.09: 68bps) over the lifetime of the credit held.

The impact of Solvency II remains a key uncertainty for the business. Legal & General is actively engaged in promoting understanding of the potential impact of the Directive on the UK and European insurance sector and its customers.  Technical and political discussions with UK and European regulators and government institutions continue, with the aim of ensuring that Solvency II achieves, in design and calibration, the objectives of the Directive.

Strategy and outlook

Three years ago, Legal & General set out a strategy to focus on improving net cash generation and return on capital.  The credit crisis of 2008/9 led us to accelerate the delivery of aspects of that strategy.  In the first half of 2010, we have achieved further improvements in the performance of the Savings business, in net cash generation, in diversification and cash generation in the International portfolio and in the profitability of all businesses.  We are ahead of the plans we set ourselves in 2008 and ahead of our target to generate £600m of net cash in 2010.

The outlook for our markets in the second half of 2010 and into 2011 continues to be mixed. UK economic growth is weak.  The housing market continues to be challenging with little prospect of material recovery over the next 12 months.  We are seeing an increase in household savings which we expect to continue to flow through to our long term savings markets over the next 12 months.  Annuities will continue to experience strong growth as defined contribution savers and defined benefit trustees continue to seek to use the annuity markets to de-risk income in retirement.  We anticipate this growth continuing into 2011.  We are pleased with the progress we have made in investment management and international.  We continue to see opportunities to export our investment management and bancassurance franchises into international markets.

The capital position of the Group has been transformed.  The foundations laid by the capital restructuring of 2007/8 delivered a resilient balance sheet which remained strong throughout the crisis.  As expected, the transformation in net cash generation is underpinning the growth in Group capital with IGD coverage ratio of 222% at the end of June 2010.  The regulatory backlash to the crisis, ongoing uncertain market and economic conditions, and the implementation of Solvency II continue to present uncertainty for our business.  Our capital strength positions us well as these debates reach their conclusion.

Looking further ahead, we anticipate a major restructuring of the global financial services market over coming years as the post crisis regulatory and political landscape evolves.  The combination of the restructuring of state ownership of banks, new capital regimes, new regulatory models and consolidation across global insurance markets will create opportunities for growth.  Legal & General is ideally positioned to take advantage of these opportunities as they arise.

Business review - Investment Management

Financial highlights £m	H1 2010	H1 2009
Investment management IFRS operating profit	98	74
Total revenue	182	143
Total costs	(84)	(69)
Net cash generation	70	54
Average ad valorem fee margin (bps)	10.6	9.6
Average expense margin (bps)	5.5	5.5
Gross new fund management mandates (£bn)	21.2	14.2
Closing funds under management (£bn)	320	271

 

Legal & General Investment Management (LGIM) delivered a 32% increase in IFRS operating profit during the first half of 2010. Profits amounting to £98m (H109: £74m) were driven by strong net inflows and growth in assets under management. Closing assets under management rose 2% to £320bn (31/12/09: £315bn) despite equity markets declining in recent months.

During the first half of the year gross new business increased 49% to £21.2bn (H109: £14.2bn) with 30% of new business derived from non-index mandates (H109: 21%). Following on from the success of 2009, LGIM continues to expand its international reach with 15% of new business coming from non-UK based clients (H109: 8%).  Net new business for the period was £8.3bn (H109: £7.9bn).

The average ad-valorem fee to fund ratio increased to 10.6bps (H109: 9.6bps) as low margin client losses were more than replaced by higher margin active fixed income, LDI business and an increasing weighting to overseas equities.  LDI assets under management increased by 67% to £37.6bn (H109: £22.5bn).

Expense to fund ratio was maintained at 5.5bps (H109: 5.5bps) despite the mix of assets continuing to move to active fixed income and LDI business as pension funds continue to de-risk. 

Outlook

LGIM remains focused on working closely with clients to continue to offer highly accessible, increasingly sophisticated products to meet their changing needs. As pension funds continue to pursue de-risking strategies, we believe demand for LGIM's range of good value, high quality and reliable products, coupled with our clear focus on customer service, will continue to grow.  We anticipate an even greater share of new business to be in active fixed income and LDI products and have a significant pipeline of new product initiatives underway. Following LGIM's success growing business during the first half of 2010 within Europe, the US and the Gulf, we will continue to seek further growth opportunities in the international arena.

Business review - Savings

Financial highlights £m	H1 2010	H1 2009
IFRS operating profit	54	17
Non insured Savings	16	(8)
Non profit Savings	6	(4)
With profit Savings	32	29
Operational cash	72	40
New business strain	(34)	(44)
Net cash generation	38	(4)
Savings new business APE	609	448
Net fund flows (£bn)	1.5	0.7
Assets under administration £bn	56	46
	H1 2010	FY 2009
Fee to fund ratio (bps)*	77	73
Cost to fund ratio (bps)*	59	72

The transformation of the Savings business continues.  IFRS operating profit was up 218% to £54m (H109: £17m) and net cash generation was improved by £42m to £38m (H109: £(4)m).  Our focus continues to be on cost management, shifting product mix towards capital light products, reducing commissions and growing assets under administration.  Cost to fund ratio at 59bps* has fallen to almost half of the 2008 level (2008: 108bps).

*Annualised, excluding With-profits

Non insured Savings

Financial highlights £m	H1 2010	H1 2009
IFRS operating profit	16	(8)
Unit Trusts	13	1
Structured Products/Other	5	(4)
Platform Business	(2)	(5)
Net cash generation	14	(5)

Non insured savings includes unit trusts, structured products, platform sales and uninsured SIPPs (including Suffolk Life).  In H110, these businesses generated £16m of operating profit compared to a loss of £(8)m in the first half of 2009.

In Unit Trusts, the profit increase was achieved through strong growth in assets under administration.  APE sales were up 53% at £141m (H109: £92m) with 10% of all new stocks and shares ISAs invested with Legal & General. 

Structured products include a range of products with fully hedged guarantees offered to customers with a lower attitude to risk from several of our bank partners and IFAs.  In H110 structured sales benefited from increased interest from the customers of our bancassurance partners with net flows of £1bn during the period.  Overall, including insured SIPPs, SIPP sales are up 7% to £60m APE (H109: £56m) representing 72% (H109: 55%) of all new individual pensions business and SIPP assets have grown to £5.2bn.   

Asset movements £bn	Unit Trusts	Structured, SIPPs & Other	Platform Business	Total
Opening assets under administration ( at 31/12/09)	9.8	6.8	1.4	18.0
Gross new business	1.4	1.5	0.6	3.5
Redemptions	(1.0)	(0.2)	(0.1)	(1.3)
Net new business	0.4	1.3	0.5	2.2
Market movements	-	-	(0.1)	(0.1)
Closing assets under administration (at 30/06/10)	10.2	8.1	1.8	20.1

Non profit insured Savings

Financial highlights £m	H1 2010	H1 2009
IFRS operating profit	6	(4)
Operational cash generation	35	24
New business strain	(34)	(44)
Net cash generation	1	(20)

Non profit insured savings includes workplace pensions, individual pensions, non profit bonds and international bonds sold via our offshore centre in Dublin.  Our strategy has been to reduce our focus on individual non profit savings through reducing expenses and commission rates.  New business strain as a percentage of PVNBP continued to fall to 2.4% in H110 (H109: 3.3%).

We continue to build scale in workplace savings where we see opportunities for profitable growth in the medium term.  We are investing in a new platform to support our workplace savings business.  Workplace non profit pensions sales were up 76% to £110m APE (H109: £63m).  We now manage around 2,000 corporate defined contribution schemes covering nearly 200,000 employees (around 36% of schemes are for employers with over 1,000 employees). We have also seen good progress in the sales of Corporate SIPPs to our workplace savings clients.  Overall non profit EEV pension margin improved from (0.4)% in H109 to (0.1)% in H110.

In UK non profit bonds, sales were down 10% against H109 at £27m APE (H109: £30m).  Recent changes in CGT for higher rate taxpayers have improved the relative attractiveness of these products.  International bonds sales increased by 750% to £17m APE (H109: £2m).  Embedded value margin across unit linked bonds improved to 0.7% in H110 (H109: (1.6)%).  In individual pensions we are continuing to reduce sales of stakeholder pensions which were down to just £12m APE in H110 (H109: £27m). 

Asset movements £bn	Workplace NP Pensions	Individual NP Pensions	NP and Int'l Bonds	Total
Opening assets under administration (at 31/12/09)	2.4	3.3	9.8	15.5
Gross new business	0.3	0.1	0.4	0.8
Redemptions	(0.1)	(0.2)	(0.5)	(0.8)
Net new business	0.2	(0.1)	(0.1)	(0.0)
Market movements	(0.1)	(0.1)	-	(0.2)
Closing assets under administration (at 30/06/09)	2.5	3.1	9.7	15.3

With-Profits Savings

Financial highlights £m	H1 2010	H1 2009
IFRS operating profit	32	29
Net cash	23	21
Assets Under administration (£bn)	20.9	18.9

With-profits comprises all products sold from the with-profits fund.  This includes with-profits bonds and with-profits pensions as well as a range of older style products which are no longer sold.  With-profits bond sales reduced year on year to £20m APE (H109: £31m)   With-profits pensions sales are also down as customers shift their preference to more modern pension savings vehicles such as SIPPs.

Asset movements £bn	Workplace WP Pensions	Individual WP Pensions	WP Bonds	WP Other	Total
Opening assets under administration (at 31/12/09)	3.8	9.4	4.4	3.8	21.4
Gross new business	0.2	0.1	0.2	0.1	0.6
Redemptions	(0.2)	(0.4)	(0.2)	(0.3)	(1.1)
Net new business	0.0	(0.3)	0.0	(0.2)	(0.5)
Market movements	-	-	-	-	-
Closing assets under administration (at 30/06/09)	3.8	9.1	4.4	3.6	20.9

Outlook

As individuals, families and companies respond to the post crisis economic landscape, we expect savings rates to increase.  Over time we anticipate that this increase will flow into our range of competitive long term savings contracts.  In the short term, our savings markets have continued to be affected by fiscal uncertainty.  The imminent implementation of the FSA's Retail Distribution Review will present opportunities and challenges for the industry but we feel well placed to take advantage of these changes. 

Our strategy of focusing on high quality, capital efficient products backed by a low cost infrastructure is succeeding.  We have made material progress in transforming Savings into a modern, high quality business.

Business review - Risk

Financial highlights £m	H1 2010	H1 2009
IFRS operating profit	310	223
Operational cash generation	212	216
New business strain	(10)	13
Net cash generation	202	229

In the first half of 2010, Risk businesses generated £212m of operational cash (H109: £216m) and £310m of operating profit (H109: £223m).  The Risk division operates in two discrete markets: the provision of income in retirement to individual savers and members of company pension schemes (annuities); and the provision of insurance services to individuals and businesses seeking to mitigate personal or corporate risk (housing & protection).

Annuities

Financial highlights £m	H1 2010	H1 2009
Operational cash generation	106	117
New business strain	35	71
Net cash generation	141	188
Annuity new business APE	106	133
Non profit annuity earned interest margin (bps)	117	124*
Non profit annuity assets under administration (£bn)	23.9	22.47

*Full year 2009

Operational cash generation of £106m represents an annualised 117bps return on £23.9bn of closing assets.  This is broadly in line with our expectation of delivering 100bps net margin from the book of in-force annuities.  In the first half of 2010, we priced annuity business above prudent reserves leading to a £35m positive new business strain in H110.  

When compared to the exceptional markets of 2008 and H109, the buyout market in 2010 has been characterised by lower volumes and value of bulk annuity transactions.  However these have been supplemented by some large longevity insurance deals.  Legal & General has continued its strategy of focusing on the core individual and small bulk schemes markets with a selective approach to larger bulk schemes with no compromise against strict return on capital criteria.  In the first half of 2010 Legal & General wrote £1,058m of new annuity business, 98% up on H209.  Individual annuity volumes were up 3% on H109 and up 57% on H209, with bulk annuity volumes down 39% on H109 but up 221% on H209.

Outlook

The increase in the minimum retirement age from 50 to 55 resulted in strong individual annuity sales in March and April.  Strong sales levels have continued as competitive pressure has eased.  Current trading conditions are expected to persist into the second half.  The change in compulsory purchase annuitisation rules is not expected to materially affect new business volumes.

In the buyout market there are some signs of increased activity and the medium term outlook remains strong.  The flow of small deals remains strong and there are signs of large schemes coming to market, although scheme closures remain affected by prevailing market conditions.  Legal & General is now participating in the longevity swap market although the size of these deals and competition levels means that deal flow in this area is likely to be characteristically uneven.

Housing & Protection

Financial highlights £m	H1 2010	H1 2009
Operational cash generation	106	99
New business strain	(45)	(58)
Net cash generation	61	41
Protection new business APE	85	90
Protection new business EEV Margin (%)	6.0	7.0
Protection gross premiums (£m)	610	561
General Insurance combined operating ratio	90	99
General Insurance gross premiums	134	136

Operational cash generation in the first half was £106m, up 7% on H109 (H109: £99m).  This increase was a result of an improved contribution from the general insurance business of £10m of cash in the first half (H109: £4m) as well as the effect of increased gross premiums in the individual and group protection businesses.  New business strain reduced by 22% to £45m (H109: £58m).

In individual protection, total premiums grew to £435m (H109: £398m) and new business sales held up at 95% of 2009 levels at £57m (H109: £60m) despite continued weakness in the UK housing market.  Legal & General retained its leading market position.  New business strain as a percentage of APE fell as we continue to focus on reducing costs and strain.  In H110, nearly 70% of new protection applications were submitted via OLPC, our market leading technology platform. 

In group protection, gross premiums grew 7% to £175m (H109: £163m).  However, corporate payrolls have continued to shrink throughout H1 and, consequently, increments to premiums have been impacted leading to a fall in total new premiums of 7% to £28m (H109: £30m).  New schemes written however have been resilient, despite weakness in corporate confidence and strong competition reflecting our reputation in this market.  Legal & General continues to focus on meeting return on capital criteria for all new business.

Despite the impact of the harsh freeze at the start of the year, general insurance operating profit improved to £14m (H109: £6m) resulting from a continued focus on expense and claims management, together with relatively benign weather conditions in the second quarter.  New bancassurance distribution agreements have been signed during the period which should contribute to growth in gross written premiums over the next few years.

Outlook

There is no sign of material recovery in the UK housing market, where we expect mortgage supply and housing transactions to remain depressed into 2011.  This, coupled with continued economic uncertainty, means that we are likely to see limited growth in UK protection markets this year.  Competition remains intense although we expect to benefit from consolidation and exits by competitors who do not have the scale necessary to compete in these markets. 

Business Review - International

Financial highlights £m	H1 2010	H1 2009
USA	44	45
Europe (France and Netherlands)	21	20
Middle East and Asia (Egypt, the Gulf and India)1	(4)	-
IFRS operating profit	61	65
New business APE2	81	75
Net cash generation	33	-

International operating profits were £61m (H109: £65m), taking account of £4m of investment in our emerging markets business and head office costs (H109: £0m).  The underlying profits of the mature businesses were, in local currency terms, 3% ahead of H109.  First half cash flow (i.e. dividends) from the international portfolio was £33m (H109: £nil).  New business growth of 8% is driven by emerging markets: over 16% of International new business is already generated in the emerging markets of Egypt, India and the Gulf.

US profits of £44m (H109: £45m) were broadly unchanged in local currency.  In March 2010, the US business paid a dividend of $50m (£33m) (H109: £nil).  We expect dividends to be a regular feature of the US operation going forward.  New business volumes in the US were £22m (H109: £29m), however positive management action on product development has led to a recovery in the second quarter with Q210 sales up 20% on Q110 (in local currency terms).  This growth in sales is expected to continue into the second half. 

In Europe, profits were £21m (H109: £20m).  In France sales were up 9% and were well ahead of market growth, totalling £36m of APE in H110 (H109: £33m).  In the Netherlands, protection sales were 7% higher than in H109.  Total APE sales in the Netherlands were £10m (H109: £13m).  

IndiaFirst, our bancassurance joint venture in India, continues to perform well.  In the first half of 2010, we sold over 80,000 policies in India across the 4,500 branches of our partner banks.  Across the emerging markets businesses we received APE sales of £13m (H109: £nil), representing our share of sales in these joint venture businesses.   

Outlook

We intend to deliver a growing and sustainable dividend flow from our developed markets businesses which is underpinned by our scale and maturity in America and Europe.  We expect these businesses to continue to grow, in particular focusing on protection products.

In emerging markets, we have made good progress.  We will continue to drive sales growth in our businesses in India and the Gulf which will, in the long term, generate distributable profits.  In India we will expand our product range and start further channel development, and we look to repeat our IndiaFirst success in other large emerging markets.  We continue to seek to develop bancassurance-led businesses in markets where we can build scale and profitability. 

1. Including head office costs.  

2. New business APE includes business written by joint ventures in line with L&G Group's shareholding.

Business Review - Group

Group capital and financing

£m	H1 2010	H1 2009 Restated
Assets invested (£bn)	3.1	2.7
Investment return	96	95
Interest expense	(59)	(65)
Investment expenses	(1)	(2)
Unallocated corporate expenses	(3)	(3)
Group capital and financing	33	25

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

Investment return was broadly flat at £96m (H109: £95m) and is calculated by taking the average smoothed investment return of 3% (H109: 3%) on the average balance of invested assets of £3.2bn (H109: £2.7bn). The amount of invested assets at the end of the year was £3.1bn (30/06/09: £2.7bn).

Variation from longer term investment return

£m	H1 2010	H1 2009 Restated
Operating profit	542	404
Variation from longer term investment return	(4)	(527)
Property losses attributable to minority interests	(1)	(20)
Profit from ordinary activities before tax	537	(143)

Below operating profit, the H1 2010 investment variance was £(4)m, a significant improvement from the first half of 2009 (H109: £(527)m).

Business review - Cash generation & sustainability

The VIF monetisation profile of the Group is broadly unchanged from year end 2009.  Of the £9.7bn of undiscounted VIF, 32% is expected to monetise in the next 5 years.

The following table shows how the £358m of net cash was generated in the first half of 2010.

	H1 2010			H1 2009
	Operational Cash	New business strain	Net cash	Operational Cash	New business strain	Net cash
Protection	96	(45)	51	90	(58)	32
Annuities	106	35	141	117	71	188
General Insurance	10		10	4		4
Other Risk	-		-	5		5
Total Risk	212	(10)	(202)	216	13	229
NP Savings	37	(34)	3	31	(44)	(13)
WP Savings	23		23	21		21
Retail Investments	14		14	(4)		(4)
Other Savings	(2)		(2)	(8)		(8)
Total Savings	72	(34)	38	40	(44)	(4)
Investment management	70		70	54		54
International dividends received	33		33	-		-
Group capital and financing	15		15	23		23
Total	402	(44)	358	333	(31)	302

Reconciliation of operation cash generation to IFRS operating profit
The following table shows the relevance of the £239m expected cash release in 2010 in the composition of total operational cash generation.

Reconciliation of non profit expected cash release to Group operational cash generation £m	H1 2010
Expected cash release - non profit	239
Investment management	70
With-profits	23
Other Risk and Savings businesses	22
International dividends	33
Group capital and financing	15
Operational cash	402

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

Reconciliation of operational cash generation to operating profit after tax £m	H1 2010
Operation cash genration	402
New business strain	(44)
Net cash	358
International profit (less dividends paid)	7
Experience variances, assumptions changes and movement	27
Investment gains and losses	15
Investment projects and other	(15)
Operating profit (net of tax)	392
Investment variance	(10)
Property losses attributable to minority interests	(1)
Profit after tax	401

New business IRR and payback periods

The following table shows the internal rate of return (IRR) and undiscounted payback periods for new business.

The IRR on protection business decreased to 15% in 2010 (FY09: 17%) as a result of increased competition.  However the undiscounted payback period remained unchanged at 5 years.  The continued favourable pricing in the annuities market resulted in a strong IRR and immediate payback.

In both unit linked bonds and non profit pensions, lower commissions and expenses have led to an increase in IRR and reduction in payback period in both areas.

New business IRR and payback periods	H1 2010 PVNBP £m	H1 2010 Internal Rate of Return1 %	H1 2010 Undiscounted payback period (years)	FY 2009 PVNBP £m	2009 Internal Rate of Return2 %	2008 Undiscounted payback period (years)
Protection	417	15	5	866	17	5
Annuities	1,058	>30	<0	1,862	>30	<0
Unit linked bonds	273	9	8	677	8	9
Pensions	1,115	7	13	1,804	6	14

1. Internal Rate of Return on new business.   

Business Review - Balance Sheet

Capital Resources - healthy IGD¹ coverage ratio of 222%

As at 30 June 2010 the Insurance Groups Directive (IGD) capital resources were £6.0bn, while the capital resources requirement was £2.7bn generating an estimated surplus of £3.3bn and a coverage ratio of 222 per cent.

Capital £m	H1 2010	FY 2009
Group capital resources	6.0	5.6
Group capital resources requirement	2.7	2.5
IGD surplus	3.3	3.1
Coverage ratio %	222	224

The half year end 2010 IGD surplus of £3.3bn increased from £3.1bn at the end of 2009 due to retained profits in the Group partially offset by the accrual of the half year dividend and an increase in the capital resources requirement.

The reconciliation from 31 December 2009 to 30 June 2010 is shown below.

IGD Surplus £bn	H1 2010	FY 2009
Opening IGD surplus	3.1	1.8
Net cash generated	0.4	0.7
Profit after tax less net cash	-	0.2
Lower Tier II debt	-	0.3
Dividends declared in period	(0.1)	(0.2)
Other2	(0.1)	0.3
Closing IGD surplus	3.3	3.1

1. All IGD amounts are estimated, unaudited and after accrual of the half year dividend of £78m (2009:  half year dividend of £65m).

2. Includes changes in solvency capital.

Movements in UK solvency capital

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

Pillar 1 capital requirement £bn	30 Jun 2010	31 Dec 2009	Change
Risk	1.5	1.4	0.1
Savings	0.1	0.1	-
With-profits	0.6	0.6	-
With-profits insurance capital component (WPICC)	0.1	-	0.1
Society long term fund	2.3	2.1	0.2
Other subsidiaries	0.4	0.4	-
Group capital resources requirement	2.7	2.5	0.2

The increase in the Risk capital requirement in 2010 reflects increased protection and annuity reserves in the first half.

The With-profits Insurance Capital Component (WPICC) is an additional capital requirement calculated if the surplus in the with-profits fund on a peak 2 basis is lower than on a peak 1 basis and represents the difference in the surplus between the two bases and is calculated based on the most onerous risk capital margin stress. 

Liquidity

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

In addition there is an undrawn committed syndicated bank credit facility of approximately £1bn maturing in December 2012. The Group also has access to liquid funds under our US$2bn Commercial Paper programme as well as holdings of £0.5bn of highly rated short term liquid assets.  The Group has no outstanding bonds that mature before 2015. There are no restrictive covenants and no credit rating or share price triggers in respect of debt or liquidity positions.

Supplementary EEV Disclosure

Analysis of EEV results £m		PVNBP			Margin (%)				Contribution
		H1 2010	H1 2009		H1 2010		H1 2009		H1 2010	H1 2009
Risk		1,475	1,755		9.4		10.1		139	178
Savings		1,869	2,060		0.6		0.3		11	7
International		536	551		1.9		2.0		10	11
Total		3,880	4,366		4.1		4.5
Contribution from new business									160	196
Expected return from in-force business									260	304
	Persistency								(2)	(4)
	Mortality / morbidity								14	15
	Expenses								(13)	(41)
	Other								44	115
Experience variances and assumption changes									43	85
Development costs									(8)	(18)
Contribution from shareholder net worth (international)									11	8
Contribution from shareholder net worth (group capital
and financing)									72	61
Operating profit on covered business									538	636
									H1 2010	H1 20091
Risk									367	460
Savings									61	24
Investment management									81	62
International									61	87
Group capital and financing									33	23
Investment projects									(14)	-
Operating profit									589	656
Variation from longer term investment return									(184)	(1,018)
Effect of economic assumption changes									179	(630)
Property losses attributable to minority interests									(1)	(20)
Profit from ordinary activities before tax									583	(1,012)
Tax									(161)	292
Profit from ordinary activities after tax									422	(720)
Diluted earnings per share based on operating profit after tax (p)									7.13	8.25
Shareholders' equity									6,958	5,556
Number of shares (m)									5,866	5,862
Shareholders' equity per share (p)									119	95

1. Restated for the revised IFRS definition of operating profit.

Operating profit
The EEV operating profit decreased by 10% to £589m in the first half of 2010 (H109: £656m). This reflects a lower opening risk discount rate applied to a lower opening in-force value in the UK coupled with a lower contribution from new business.

New business contribution

Contribution from worldwide new business at £160m is 18% lower than the corresponding period last year (H109: £196m) primarily as a result of lower new annuity business in Q1 coupled with more favourable annuity pricing conditions in the first half of 2009 than in 2010.

Risk: Margin 9.4% (FY09: 10.4%).

Annuities: Margin 10.8% (FY09: 11.7%).  IRR > 30% (FY09: > 30%).  Payback period < 0 years (FY09: < 0 years).  The annuity margin of 10.8% has benefited from an extension of the favourable pricing conditions referred to in the IFRS section albeit to a lesser extent than in the first half of 2009.

Protection: Margin 6.0% (FY09: 7.9%).  IRR 15% (FY09: 17%).  Payback period 5 years (FY09: 5 years).  The new business margin has decreased in 2010 as a result of a greater competition in Individual and Group Protection.

Savings: Margin 0.6% (FY09: 0.5%).

Unit linked bonds: Margin 0.7% (FY09: (0.6)%).  IRR 9% (FY09: 8%).  Payback period 8 years (FY09: 9 years).  The increase in margin is primarily the result of a continuation from H209 of a more favourable business mix with an increased proportion of portfolio bond sales coupled with lower initial commissions.

Non profit pensions: Margin (0.1)% (FY09: (0.6)%).  IRR 7% (FY09: 6%).  Payback period 13 years (FY09: 14 years).  The pensions margin has approached breakeven in the first half benefiting from lower commissions and expenses in the period.

With-profits: Margin 2.1% (FY09: 2.9%).  The with-profits margin is lower than 2009 largely as a result of a reduction in average with-profits pensions premium sizes.

International: Margin 1.9% (FY09: 2.6%).  The international margin benefited from a lower risk discount rate offset by a reduction in new business in the US resulting in higher unit costs.

In-force Contribution
The expected return from in-force business decreased to £260m (H109: £304m) due to the unwind of a lower risk discount rate (8.0% vs 8.3%) on a lower in-force value in the UK.

Experience variances and assumption changes in our worldwide Risk and Savings businesses of £43m (H109: £85m) included:

Persistency: adverse £2m (H109: adverse £4m).  There have been no material persistency variances in the period.

Mortality/morbidity/longevity: favourable £14m (H109: favourable £15m).  The variance is the result of a release of surplus individual protection reserves.

Expenses: adverse £13m (H109: adverse £41m).  The H110 variance is primarily due to higher assumed future investment expenses.

Other: favourable £44m (H109: favourable £115m).  H110 primarily reflects one-off modelling improvements and the unwind of the cost of capital on the value of in-force.  H109 reflects a reassessment of future bulk annuity reserve releases as data is loaded onto the administration system and one-off modelling improvements.

Investment Management

The Investment Management business is reported on an IFRS basis; operating profit of £81m (H109: £62m) excludes £17m (H109: £12m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a "look through" basis and as a consequence are included in the Risk and Savings covered businesses on an EEV basis.

Group Capital and financing

Operating profit from Group capital and financing represents profit on the shareholder assets held within the covered business, reported on an embedded value basis and profit on the shareholder assets held outside the covered business reported on an IFRS basis. The profit from Group capital and financing of £33m in 2010 increased by 43% (H109: £23m) as a result of higher average invested assets in 2010.

Profit before tax

Profit before tax includes the variation from longer term investment return and the effect of economic assumption changes.  EEV profit before tax was £583m (H109: £(1,012)m)

The H110 variation from longer term investment return of £(184)m compares to £(1,018)m in the corresponding period last year.  The 2010 variance is primarily due to a reduction in the credit exposure to corporate bonds and an increase in sovereign debt holdings of £(40)m and an increase in the cost of capital as a result of a reduction in the equity ratio backing the solvency capital of £(43)m.

The positive effect of economic assumption changes amounted to £179m (H109: £(630)m) and reflects a lower risk

Enquiries

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

Notes

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

A presentation to analysts and fund managers will take place at 09.30 GMT today at One Coleman Street, London EC2R 5AA. There will be a live webcast of the presentation which can be accessed at

http://investor.legalandgeneral.com/investors/results.cfm.  A replay will be available on this website later today.

There will be a live listen only teleconference link to the presentation.  Investors should dial [phone].  The passcode is "L&G Half-Year".

There will be a further teleconference at 15.30 GMT (10.30 EST) to answer specific technical and accounting questions. Investors should dial [phone].

Financial Calendar 2010	Date
Ex dividend date	1 September 2010
Payment of 2010 Half-year dividend	1 October 2010
Q3 Interim Management Statement	9 November 2010
2010 Preliminary Results Announcement	17 March 2011

Forward looking statements

This document may contain certain forward-looking statements relating to Legal & General Group, its plans and its current goals and expectations relating to future financial condition, performance and results. By their nature forward-looking statements involve uncertainty because they relate to future events and circumstances which are beyond Legal & General's control, including, among others, UK domestic and global economic and business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory and Governmental authorities, the impact of competition, the timing impact of these events and other uncertainties of future acquisition or combinations within relevant industries. As a result, Legal & General Group's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in these forward-looking statements and persons reading this announcement should not place reliance on forward-looking statements. These forward-looking statements are made only as at the date on which such statements are made and Legal & General Group Plc does not undertake to update forward-looking statements contained in this document or any other forward-looking statement it may make.

Principal risks and uncertainties

REGULATION AND LEGISLATION	Overview Changes in regulation or legislation may have a detrimental effect on our strategy or profitability Regulation defines the overall framework for the design, marketing and distribution of our products; the acceptance and administration of business; and the prudential capital that we hold.  Legislation and government fiscal policy can also influence our product design, the retention of existing business and our required reserves for future liabilities. Current areas of significant regulatory change include Solvency II and the Retail Distribution Review, both targeted for implementation in 2012. Additionally, following the general election in May 2010, a range of policy announcements have been made by the new government in respect of the future regulation of the sector and the provision for retirement. There also remains potential for new regulation in response to recent market events.		Mitigation The Group bases its business strategy upon prevailing regulation and legislation, and known/anticipated change.  To mitigate the risk of legislation or regulation adversely impacting the sectors in which we operate, the Group seeks to engage with regulatory and legislative authorities to assist in the evaluation of change and develop outcomes that meet the needs of all stakeholders.
FINANCIAL MARKET AND ECONOMIC CONDITIONS	Overview Investment market performance or conditions in the broader economy may adversely impact our results The Group holds a broad range of investment assets to meet the obligations arising from writing insurance business. The performance and liquidity of investment markets, interest rate movements and inflation can impact the value of these assets as well as the value of the underlying obligations. The income derived by our investment management activities can also be impacted by significant falls in investment asset values, whilst broader economic conditions can influence the purchase by customers of retail financial services products and how long they are retained. During 2010 investment markets have remained relatively stable. However, broader economic conditions continue to remain uncertain, with possible consequences to investment values. The occurrence of a significant macro-economic event such as a sovereign debt crisis within a developed world economy poses the threat of considerable disruption to investment markets.		Mitigation The Group seeks to reduce the impact of these risks through ensuring the profile of cash flows of our assets and liabilities are appropriately matched. Matching techniques include using financial instruments as part of formal risk management strategies to reduce volatility in returns from investment assets, the effect of changes in interest rates and inflation, and the broader effects of adverse market conditions. We seek to reduce the impact of market and economic conditions upon our investment businesses through the utilisation of a low cost scalable business model and by maintaining a diversified portfolio of products.
COUNTERPARTY AND THIRD PARTY RISKS	Overview In dealing with issuers of debt and other types of counterparty the Group is exposed to the risk of default  As part of our strategies to appropriately match long term assets and liabilities, exposures can arise to the issuers of corporate debt and other financial instruments. As part of our day to day business we also have exposures to banking, money market and reinsurance counterparties, as well as the providers of investment settlement and custody services. Third party risks also arise through reliance upon external suppliers for certain administration and IT] services.		Mitigation The Group seeks to limit the potential exposure to loss from counterparty and third party failure through setting robust selection criteria and exposure limits covering factors such as counterparty financial strength, sectors and geography. Exposures against limits are actively monitored, with trigger levels being set and management action being taken to pre-empt loss from default events.
UK FINANCIAL SERVICES SECTOR CONTAGION RISKS	Overview As a UK based Group, earnings are influenced by the perception of the UK financial services sector as a whole Factors such as investment market performance, actions by regulators against organisations operating in sector and shock events, including matters such as significant market failures, can impact the confidence of retail investors in the sector as a whole and their purchase or retention of financial service products.		Mitigation We continue to seek to differentiate our business model from that of our competitors. This includes a diversified portfolio of risk, savings and investment management businesses in the UK. In addition, we are focused on developing our international businesses, with joint ventures in India and the Gulf, complementing our existing portfolio of overseas activities.
MORTALITY CATASTROPHE AND OTHER ASSUMPTION UNCERTAINTIES	Overview Revisions to assumptions may require adjustments to reserves for long term business The writing of long term insurance business necessary requires the setting of assumptions for long term trends in factors such as mortality, persistency, valuation interest rates and credit defaults. Household insurance business requires assumptions to be made for factors such as extreme weather events and other catastrophic risks. A prudent approach is taken to evaluating required reserves for these risks. However, extreme events, such as for example a rapid advance in medical science leading to significantly enhanced annuitant longevity, may require assumptions to be recalibrated impacting profitability and capital.		Mitigation The Group uses its pricing capabilities and significant bank of experience data to assess and charge an appropriate premium for known risk factors, and to ensure that reserves remain appropriate on an ongoing basis. The evaluation of reserves is supported by stress and scenario testing which seek to validate the appropriateness of key assumptions to combinations of extreme events, including economic conditions, investment performance and product specific matters.
INDUSTRY CHANGE	Overview The Group may not maximise opportunities from structural changes within the financial services sector  The financial services sector is going through a period of change and consolidation. This presents a range of challenges as well as opportunities to providers of sufficient scale such as Legal & General. The emergence of niche product providers with new business models continues to drive innovation within a number of the sectors in which the Group operates.		Mitigation Legal & General seeks to ensure it has market leading expertise in the core fields in which it operates, and actively focuses on retaining the best personnel with the knowledge to design and support our products, and manage their evolution as market and consumer expectations change.

Directors' Responsibility Statement

We confirm to the best of our knowledge that:

·      the condensed set of IFRS financial statements has been prepared in accordance with IAS 34 as adopted by the European Union;

·      the Interim Management Report includes a fair review of the information required by DTR 4.2.7, namely an indication of important events that have occurred during the first six months of the financial period and their impact on the condensed set of financial statements, as well as a description of the principal risks and uncertainties faced by the Company and the undertakings included in the consolidation taken as a whole for the remaining six months of the financial year;

·      the Interim Management Report includes, as required by DTR 4.2.8, a fair review of material related party transactions that have taken place in the first six months of the financial period and any material changes in the related party transactions described in the last Annual Report;

·      the European Embedded Value basis consolidated income statement, the consolidated statement of comprehensive income and the consolidated balance sheet and associated notes have been prepared on the European Embedded Value basis as set out in Note 5.21; and

·      The directors of Legal & General Group Plc are listed in the Legal & General Group Plc Annual Report for 31 December 2009, except Dr Ronaldo Schmitz who resigned as a non-executive director of the company on 26 May 2010. A list of current directors is maintained on the Legal & General Group Plc website: www.legalandgeneralgroup.com.

By order of the Board

T.J. Breedon                                                                         N.D. Wilson
Group Chief Executive                                                        Group Chief Financial Officer
3 August 2010                                                                      3 August 2010

 

END

 

 

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