Half Yearly Report

RNS Number : 8025W

Legal & General Group Plc

04 August 2009

 



Stock Exchange Release  

4 August 2009        

Stronger balance sheet, stronger net cash, repositioning the business, driving down costs

Operational cash generation and performance

·          On target to generate £450m of net cash in 2009

        Net cash generated in H1 of £302m (FY 2008: £320m)

·          Cost reduction programme on track

£50m annualised cost reduction expected by year end

·          IFRS operating profit £31m (H1 2008: £391m)

Result reduced by negative investment variances of £351m

·          EEV operating profit £657m (H1 2008: £589m), up 12%

·          New business APE £746m (H1 2008: £806m)

Sales robust - action on product mix, pricing and commissions

Improved EEV margin on UK new business

Capital and cash flow outlook supports reduced dividend of 1.11p (H1 2008: 2.01p)

10% progression from rebased 2008 dividend

Balance sheet

·          IGD surplus £1.9bn at 30 June 2009, after dividend of £65m

         Excludes £0.3bn of qualifying lower tier 2 bonds issued in July

         Proforma coverage ratio increased to 192% (FY 2008: 169%)

·          Non profit annuity credit default provisions increased to £1.3bn (FY 2008: £1.2bn)

         Available release of short term default provision retained in reserves

         Aggregate provision 74bp p.a. over the run off of the portfolio (FY 2008: 68bp)

Group Chief Executive, Tim Breedon, said:

 'We have made strong progress in improving our net cash generation, strengthening our balance sheet and reducing costs. Management actions in the first half ensured that Risk and Investment management remain strongly cash generative and the Savings business has turned the corner. We have strengthened the balance sheet with proforma IGD surplus at £2.2bn and we expect to realise annualised cost savings of £50m by the end of 2009. IFRS operating profit has been reduced by £351m of negative investment variances in the period.

The Board has therefore decided to pay an interim dividend of 1.11p reflecting our growing confidence in cash generation and our continued determination to strengthen the balance sheet during the ongoing economic uncertainty while rewarding shareholders.

Our focus remains on capital strength, net cash generation and cost reduction. As a Group we benefit and continue to exploit substantial synergies between Risk, Savings and Investment management to service our customers and create value for shareholders. Confidence has started to return to markets but we expect some continued uncertainty for the remainder of 2009. As a result of the actions we have taken in the first half of this year and will continue to take in the second half of the year, Legal & General is better positioned to take advantage of new opportunities to grow profitably as the economy recovers.' 

Financial highlights £m	H1 2009	H1 2008
IFRS operating profit	31	391
IFRS loss from ordinary activities after tax	(91)	(27)
IFRS shareholders’ equity per share (p)	56.2	78.2
Interim dividend (p)	1.11	2.01
EEV operating profit	657	589
EEV (loss)/profit from ordinary activities after tax	(720)	73
EEV shareholders’ equity per share (p)	94.8	124.7

All references to IGD amounts are based on draft, unaudited regulatory returns

Group Chief Executive's Statement

In the first half of 2009 we made significant progress on cash generation, balance sheet strength and cost management. We are writing new business on more capital efficient terms, achieving a shorter payback profile and better returns. We have actively reduced sales in less economically attractive lines of business, reflecting our view of the need to recognise the increased scarcity and cost of capital since the start of the credit crisis. These actions have driven a significant improvement in the cash dynamics of our business, generating £302m of net cash in the first half.

We are very clear on the characteristics of the businesses we want at the heart of the company. We like businesses with high scale operations in large markets, strong client and distribution franchises, rapid cash generation and long term customer relationships. Most of our businesses already possess these characteristics and we are focused on developing strong positions across our markets.

Our Investment management business is continuing to diversify its product range in line with customer needs, but remains committed to good value products and excellent customer service. The strength of our franchise can be seen in continued strong net inflows to LGIM of £7.9bn, which have increased assets under management despite investment market conditions. Particularly encouraging is the progress being made by our core fixed income and LDI products. LGIM continues to be strongly cash generative, profitable and uniquely positioned to support and benefit from our other Group businesses. 

Our Risk business is highly cash generative, making a contribution of £229m in the first half to the Group.  Despite the operational challenges of a weaker housing market and the uncertain economic outlook for corporate customers, the protection and annuity businesses continue to build further on their clear competitive advantages of scale, risk management and diverse product offering. We continue to invest in market leading operational capability, underwriting and distribution in order to build these businesses further.

Our Savings business has turned the corner in 2009 and the second half should see a further improvement in the underlying net operational cash contribution. We have improved product mix, driven out costs relentlessly, reduced commissions and redesigned products to improve returns despite lower market values impacting revenues. There is more to be done and we are pursuing further initiatives vigorously.

In International, our established operations are responding to the challenges of the current economic climate and remain well positioned to capitalise when recovery comes. We have also been planting the seeds of long term growth in new and exciting markets. In India we have received 'R1' regulatory clearance and expect to be operational in the new-year. Our Gulf joint venture is already up and running.

We believe we have the right businesses and we see great value in the multiple layers of synergy that result from an integrated strategy. LGIM manages £20bn of assets for our annuities business. More than half of BPA customers in the first half were clients of LGIM. Our Savings business has a growing pool of individual pension savings which generated more than £150m of annuity sales in the period. The Savings business has also capitalised on LGIM's range of expertise in broadening our unit trust offering to specialist intermediaries. All of our businesses benefit from the strength of our brand and balance sheet.

Our business remains strongly underpinned by our capital base. Our IGD surplus strengthened to £1.9bn at the end of June.  This is before the benefit of £0.3bn of qualifying lower tier 2 debt securities issued in July. We estimate a proforma IGD coverage ratio of 192% (FY 2008: 169%). Capital strength remains a key focus for us and we will continue to take management action where appropriate to ensure our balance sheet remains strong and resilient.

Earlier in the year we announced increased provisioning against credit default risk in our UK non profit annuities portfolio. Actual defaults in the first half of the year were just £1m net of expected recoveries.  However, the decision has been taken not to release any favourable experience from the short term default provision, but instead to further strengthen long term default provisions, to reflect the continued risk level in the global economy. The aggregate provision now represents 74bp p.a. across the life of the portfolio, up from 68bp at the end of 2008. In addition we have reduced exposure to some credits, including reducing junior subordinated bank debt to 2.5% of the UK non profit annuities portfolio from 6.5% at the end of 2008.

Our priorities for 2009 remain balance sheet strength, supported by strong improvement in net cash generation and further progress on cost reduction. We are clearly on target to deliver our full year 2009 net cash target of £450m.

Dividend

In considering the interim dividend for 2009, the Board has taken into account the current and prospective economic conditions and its focus on capital strength and net cash generation. 

The interim dividend has been reduced by 45% to 1.11p per share, a cost of £65m. This represents 10% progression from the rebased 2008 dividend, indicating growing confidence in sustainable cash flow generation, balanced with our commitment to a strong balance sheet. Subject to satisfaction with the strength and resilience of our capital position, we will be looking to grow the dividend in line with expected medium term growth in operational cash.

Outlook

We have the right strategy and our model, grounded in our three key businesses, is in place. At the same time our strategic execution is progressing well despite difficult markets. We are very clear on the sort of business we want to be and we are making good progress in the markets that are important to us. The turnaround in Savings is progressing well, but there is still a lot more to do. We are comfortably on track to deliver our operational cash target. The balance sheet is stronger, IGD surplus has increased, and is resilient to further shocks. The medium term outlook for our core markets is positive. We are well positioned for the future.

Current market conditions remain challenging, with weakness in the economy and volatility in investment markets putting pressure on consumer confidence. However, these conditions highlight the importance to our customers of a financially strong, integrated Risk, Savings and Investment management business with a focus on value for money products and a long term commitment to customers and shareholders. 

Our industry has a vital role to play in securing a successful economic recovery. As well as helping millions of customers to manage their financial future, we provide a significant share of the equity and debt funding of Corporate UK. The interests of every stakeholder in this industry are best served by confidence in markets and consistency in regulation and taxation.  We will therefore remain fully engaged in securing the best outcomes for savers, pensioners and companies in the UK.

Group financial results

In November 2008 we set out the key metrics by which we manage and monitor our businesses. This puts greater emphasis on IFRS. Supplementary EEV financial results are discussed later in this document.

Net cash generation

Net cash is defined as the operational cash generation of our businesses, less new business strain. 

Operational cash 

Operational cash is the expected release from in-force for the UK non profit Risk and Savings businesses, the shareholders' share of bonuses on With-profits business and the post-tax IFRS operating profit on other UK businesses.  

Operational cash generation £m	H1 2009	FY 2008
Risk	216	379
Savings	43	138
Investment management	51	115
Group capital and financing	23	22
	333	654
New business strain £m
Risk	13	(173)
Savings	(44)	(161)
	(31)	(334)
Net cash £m	302	320

Net cash 

Net cash generated was £302m in the first half of the year, showing rapid progress in comparison with £320m for the full year 2008 as a result of action to substantially reduce new business strain. This result has benefited in particular from the initial effects of our Savings transformation programme, stronger pricing conditions seen in the annuities market since Q3 2008 and the delivery of our cost reduction programme. We remain cautious that pricing conditions may not be as favourable in the second half of the year, however action on cost savings give us confidence that we are on track to deliver our stated target of £450m net cash for the full year 2009. Our cost reduction programme has already been successful in the first half of the year, and actions taken have already reduced UK headcount. We indicated earlier this year that, on top of a 10% reduction in UK headcount in 2008, we expect to deliver a similar reduction in 2009. We remain confident in delivering at least this full year target based on announcements already made, which will lead to a £50m reduction in annualised costs.

Non profit product level net cash generation(1), new business IRR(2) and payback periods(2)

H1 2009 £m	Protection	Annuities		Pensions	Unit linked bonds	Total non profit
Net cash generated(1)	31		188	(14)	2	207
IRR/payback
IRR on new business written (%)	16	n/a(3)		7	6
Payback period (years)	5	n/a(3)		12	9

Notes:    (1) Includes analysis of results for Legal & General Assurance Society and Legal & General Pensions Limited.

               (2) IRR = Internal Rate of Return on new business. Payback period is calculated on an undiscounted basis

               (3) Given negative strain on annuity business in the first half of 2009 and an immediate IFRS payback, IRR calculations are not applicable.

IFRS profit before tax

Summary income statement £m	H1 2009	H1 2008(1)
Risk	(128)	75
Savings	(5)	111
Investment management	70	91
International	65	48
Group capital and financing	29	66
Operating profit	31	391
Variation from longer term investment return	(154)	(422)
Property losses attributable to minority interests	(20)	(13)
Loss from ordinary activities before tax	(143)	(44)
Tax	52	17
Loss from ordinary activities after tax	(91)	(27)

Notes:1: Reclassified to reflect IFRS 8 segmental analysis

Balance sheet £m	H1 2009	FY 2008
Shareholders' equity	3,295	3,588
Shareholders' equity per share (p)	56.2	61.2

IFRS operating profit was £31m (H1 2008: £391m). The result for H1 2009 includes aggregate non profit assumption changes, experience variances and non-cash items of negative £322m compared to positive £97m in H1 2008. 

These effects are seen clearly in the Risk business operating result, a loss of £128m (H1 2008: profit of £75m). The Savings business operating result was a loss of £5m (H1 2008: profit of £111m); the year on year reduction reflects lower income from the in-force book on the back of lower asset values and the absence in 2009 of one-off reserving benefits in the first half of 2008. The transfer in respect of the With-profits business also reduced.

Below the operating profit line, the effect of variations from longer term investment returns was negative £154m (H1 2008: negative £422m) reflecting the effect of adverse investment markets on shareholders' assets. The post tax result from ordinary activities of a loss of £91m fully reflects this mark to market on investment positions (H1 2008: loss of £27m).

Allowing for the post tax loss, exchange rate losses and £120m of dividends paid in the period, shareholders' equity reduced from £3.6bn at year end 2008 to £3.3bn at 30 June 2009.

UK Risk and Savings

Financial highlights £m	H1 2009	H1 2008
Analysis of UK Risk and Savings business result
Risk business operating result	(128)	75
Savings business operating result	(5)	111
	(133)	186
Further analysed as:
- Operational cash generation	238	234
- New business strain	(31)	(233)
- Other non profit business operating result	(322)	97
- Tax gross-up	(46)	39
- Non profit business operating (loss)/profit	(161)	137
- With-profits	29	60
- General Insurance	6	(4)
- Core retail investments	(1)	2
- Other(1)	(6)	(9)
UK Risk and Savings business result	(133)	186

Notes:1: Includes result for Nationwide Life and Suffolk Life

The operational cash generation from the in-force non profit business was £238m (H1 2008: £234m), reflecting the unwind of margins on UK non profit business written in prior years. New business strain was materially lower at £31m (H1 2008: £233m) as a result of the extensive management actions highlighted at our preliminary results to improve the pricing, mix and cash profile of our sales. The balance of strain and release in the period was strongly positive at £207m (H1 2008: £1m).

Other non profit business contributions - including experience variances, assumption changes and non-cash items - were negative £322m (H1 2008: positive £97m). The most significant effect in H1 2009 was £351m of investment variances in the assets backing the liabilities of the non profit business. There are three main elements to this variance:

1) Cash and overlay effects - £206m

Our annuities business is underpinned by a globalised credit investment management strategy. This includes overlay strategies used to mitigate currency and overseas interest rate risks. The globalisation and associated risk diversification of the portfolio have delivered significant value added to the annuity business in comparison with the more traditional approach used until recently. Since the start of 2008 our global bond strategy would have materially outperformed the equivalent duration Sterling portfolio. There are however a number of frictional effects associated with the overlay strategy which create volatility in reported earnings. 

During the first half, volatile market and currency movements impacted on our cash and overlay strategy to create a number of yield effects on IFRS profit, the three most significant of which were:

• £85m yield impact from settling overlay forward foreign exchange hedging contracts in January.

• £88m from receiving larger than normal cash settlements associated with our foreign exchange hedging programme. Volatile market conditions resulted in a lower yield on reinvestment.

• £30m from earned cash interest rates being below assumptions.

We have taken steps to mitigate the impact of these interactions in future.

2) Action taken to sell a number of corporate credits - £75m

In the period we have taken advantage of the UK banks' tenders of junior subordinated debt at above market price and reinvested the proceeds without incurring a loss in yield. Additionally, and despite minimal actual defaults in the first half of the year, we have actively pursued a programme of disposal of less attractive credits. For example our holdings of tier 1 and upper tier 2 bank securities have fallen to 2.5% of the portfolio at the end of June, compared to 6.5% at the end of 2008. In aggregate there has been a small reduction in yield from these actions which has contributed to a £75m negative investment variance in the IFRS operating result. 

3) The net effect of the strengthening of UK non profit annuity credit default provision - £55m

Our UK non profit annuity portfolio default reserves were £1.3bn at the end of June, including the £650m short term default provision which we have maintained within these results despite favourable default experience. In the first half of 2009, default losses in our UK annuity portfolio amounted to just £1m net of expected recoveries. This amounts to just 0.005% of the total market value of the UK non profit annuities portfolio. Within these results, we have increased the long term default assumption for statutory and IFRS reporting to 36bp from 30bp previously. This increase reflects the effect of applying the credit rating downgrades experienced during 2009 to our default model. These provisions represent 74bp p.a. (previously 68bp) across the life of the UK non profit annuity credit portfolio.

After grossing up for tax, the aggregate non profit business result was negative £161m (H1 2008: positive £137m).

The shareholders' share of with-profits bonuses was £29m, lower than the level reported for H1 2008 (£60m) due to lower bonus rates on maturities and lower surrender activity this year. 2008 was also a peak year for maturities.

General insurance gross written premiums reduced by 4% to £136m (H1 2008: £142m) in difficult market conditions for mortgage related sales. However overall performance has improved in the period, with an operating profit of £6m (H1 2008: loss of £4m). 

Investment management

Operating profits were 23% lower at £70m (H1 2008: £91m), reflecting the impact of volatile investment markets on asset balances in the first half of the year, and consequent pressure on fee income. This result is discussed in more detail in the Business Review section.

International

IFRS operating profit was £65m, up 35% (H1 2008: £48m). This reflects the positive impact of strain and expense management in our USA and Netherlands businesses, offset by lower margins in our French business. This result is discussed in more detail in the Business Review section.

Group capital and financing

IFRS operating profit £m	H1 2009	H1 2008
Investment return	95	164
Interest expense	(65)	(70)
Investment expenses	(2)	(3)
Unallocated corporate expenses	(3)	(6)
Defined benefits pension scheme	4	(19)
Total	29	66

The Group capital and financing operating result largely reflects smoothed investment returns on shareholder assets in our UK Risk and Savings businesses, shareholder assets held at Group level and interest charges. In previous periods both investment return and interest expenses were presented including the returns on and cost of internal contingent loans. These figures are now stated excluding the contingent loan, the effect of which amounted to £26m of both investment return and interest cost in H1 2008. 

Investment return decreased to £95m (H1 2008: £164m). Investment returns are calculated on the basis of a smoothed investment return (aggregate rate for six months: H1 2009: 3%; H1 2008: 3%) on a quarterly average balance of assets of £3.2bn in H1 2009 (H1 2008: £4.9bn). The balance of assets at the end of the period was £2.7bn, and we expect this balance of assets to increase in the second half as a result of debt issued in July, offset by payment of the interim dividend. The reduction in the average balance of assets reflects lower investment markets and £650m moved into short term default reserves as announced earlier this year. The investment return also reflects the effect of equity sales made in the early part of this year and the latter part of 2008.

Interest expenses reduced to £65m (H1 2008: £70m), including the effect of lower floating rates on short term debt.

New business

New business APE £m	H1 2009	H1 2008
UK Risk	223	288
UK Savings	448	456
Total UK Risk and Savings	671	744
International	75	62
Worldwide Risk and Savings	746	806
Investment management new mandates	15,137	17,645

Headline UK sales in the first half of 2009 were 10% lower at £671m of APE (H1 2008: £744m). Q2 sales, however, at £338m were ahead of Q1 and in line with the quarterly average for the last 18 months, but below last year's very strong second quarter. This reduction in sales reflects slower closure rates of bulk purchase annuity contracts in Q2 and management action to reduce sales of less attractive Savings products.

Balance sheet management 

Capital resources

As at 30 June 2009 the Insurance Groups Directive (IGD) capital resources were £4.3bn, while the capital resources requirement was £2.4bn generating a surplus of £1.9bn and a coverage ratio of 179%. 

	H1 2009 £bn	FY 2008 £bn
IGD capital resources	4.3	4.4
Capital resources requirement	2.4	2.6
IGD Surplus	1.9	1.8
Coverage ratio	179%	169%

IGD surplus at 30 June was £1.9bn, up from £1.8bn at 31 December 2008 and £1.6bn at 31 March 2009.

In July 2009 we issued £300m of lower tier 2 debt with a coupon of 10%.  As a result the proforma IGD surplus stands at £2.2bn, with a coverage ratio of 192%. All figures are net of dividend costs.

For With-profits business, the realistic capital position has strengthened over the first half of 2009. On a Peak 1 basis, the regulatory surplus capital has decreased by £0.2bn, due primarily to market conditions in the first half and maturities in our mortgage endowment portfolio. As a result, the Peak 1 basis was more onerous than Peak 2 at 30 June and therefore the With-profits Insurance Capital Component is zero (FY 2008: £0.2bn).

We estimate that a 40% fall in equities would reduce the IGD surplus at the end of June by £0.7bn, in line with the year end estimated impact. 

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 net 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 first half of 2009 we maintained a daily average cash balance in excess of £1bn of overnight cash deposits and significant holdings of liquid assets such as Gilts.

Our Group liquidity position is also strong. We have a circa £1bn undrawn committed syndicated credit facility which matures in December 2012. We also have access to liquid funds under our US$2bn Commercial Paper programme. In addition the Group holds the proceeds of the recent £300m lower tier 2 bond issue in liquid short term investments.

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 our debt or liquidity position.

Business review - Risk

Financial highlights £m	H1 2009	FY 2008
Total new business APE	223	488
Total Gross Written Premium	2,089	4,334
Operational cash generation	216	379
New business strain	13	(173)
Net cash	229	206
Protection new business EEV margin	7.0%	6.2%
IFRS operating loss	(128)	(603)

Overview

We have made progress in the operational performance of our business in the first half of the year. Risk made a contribution to Group operational cash generation of £216m before new business strain (FY 2008: £379m) reflecting the scale and growth of the business over recent years. Net cash generation from the Risk business increased to £229m, being higher in the first half of 2009 than the entirety of 2008 (FY 2008: £206m).

The IFRS operating loss of £128m (H1 2008: profit £75m) reflects these strong underlying cash dynamics, offset by negative experience variances and assumption changes. In particular the Risk business reflects the majority of negative investment variances which are discussed earlier in 'Group Financial Results'.

New business APE of £223m was 23% lower (H1 2008: £288m), with protection sales impacted by conditions in the mortgage market and some deferral of BPA closure by clients in volatile markets. We continue to re-focus our annuity appetite into the individual market where pricing conditions have been favourable. Gross written premiums in our General Insurance business of £136m (H1 2008: £142m) were 4% lower, as economic conditions caused a downturn in mortgage related sales; however operating profitability improved.

Operational cash generation and operating profit

Protection business: net cash generation was £31m in the first half of the year. New business strain fell, reflecting our focus on higher margin business, discipline in pricing and cost management. The new business EEV margin was 7.0% in H1 2009 (FY 2008: 6.2%; H1 2008: 6.9%) despite continued price competition. 

Annuity business: net cash generated was significantly ahead of that delivered in 2008 at £188m (FY 2008: £108m). This reflects the growing size of the annuity portfolio and better pricing and risk selection capability which has significantly reduced the expense of writing new business, resulting in a negative strain. Net cash does not include any release from the short term default provision.

Strain levels in our annuities business will naturally depend on pricing conditions in any future period. Despite narrowing credit spreads and some signs of increasing competition towards the end of the period we maintained target profitability whilst fully reflecting the risks we are assuming.  

General Insurance business: the household and accident, sickness and unemployment ('ASU') businesses delivered an improved combined operating ratio of 99% (H1 2008: 107%) and an operating profit of £6m    (H1 2008: loss of £4m). Within this result the household business delivered improved operating profit of £6m (H1 2008: loss of £7m). This more than offset an increase in claims cost within our smaller ASU business.  

IFRS Operating Profit: an operating loss of £128m in the first half of the year (H1 2008: profit of £75m) reflects much stronger underlying cash profitability, offset by the impact of experiences and assumption changes in the in-force portfolio. The detail of these changes is included in the Group Financial Results section.

New Business

Protection: APE was 18% lower at £90m (H1 2008: £110m).

Individual protection: sales of £30m of APE in each quarter this year are comparable to quarterly sales reported for H2 2008 (Q4 2008: £33m; Q3 2008: £34m). Application volumes remain resilient, with some decrease in average case sizes. We continue to diversify away from mortgage related business with continued successes in high net worth, family and business protection sales. Overall H1 individual protection volumes fell by 18% comparing favourably with an almost 60% drop in gross mortgage lending (Council of Mortgage Lenders data). Our distribution partnership with Nationwide Building Society continues to perform well with sales up 40% and direct sales increased by 14%. 

Group protection: sales of £30m fell period on period due to the unusually high volume of business in Q2 2008 when we closed several large schemes (H1 2008: £37m). The competitive environment remains dynamic. There are new entrants emerging, and some existing companies are exiting the market, with the overall result of intensified pricing activity. There are segments of this market which have seen unsustainable pricing in our view and we have stepped away from them. Opportunities remain to build new business further in some areas, although we expect continued pressure on incremental premiums as tough economic conditions impact our corporate customers.

Despite lower new business volumes, the scale of our protection business was maintained with overall gross written premium being modestly higher £561m (H1 2008: £555m).

Annuities: APE 25% lower at £133m (H1 2008: £178m)

Bulk purchase annuities ('BPA'): we maintained our prudent and selective approach to pricing, reflecting the significantly increased cost of capital in this market. Sales in the first half were £74m (H1 2008: £138m). Quotation activity remains robust but the more uncertain economic environment has impacted decision making for a number of schemes and sponsoring companies.

Individual annuities: favourable conditions in Q1 2009 have largely continued in Q2 with sales for the first six months of £59m being 48% higher than the same period in 2008. 

Outlook

In protection we have made further developments in our product offering which are due to come online in H2 2009, but we do not expect a rapid recovery in volumes or pricing. The sector continues to be highly competitive with significant pressure on commission terms particularly in the IFA market. Our strong and diversified distribution capability provides resilience in such conditions. As the economy recovers our scale and strength in the protection market position us excellently for profitable growth.

Our appetite for annuity business remains unchanged, with significant long term opportunities for Legal & General in this market. We expect some continuing uncertainty in the BPA market as potential customers' attitude to current economic conditions is reflected in their decision making. As spreads reduce, competitive pressure in the individual market is increasing.

Business review - Savings 

Financial Highlights £m	H1 2009	FY 2008
New business APE	448	879
Operational cash generation	43	138
New business strain	(44)	(161)
Net cash	(1)	(23)
IFRS operating (loss)/profit	(5)	66
Assets under administration £bn	46	46
Net fund flows £bn	0.7	0.4

Overview

During 2009 our key focus has been to accelerate the repositioning of the Savings product portfolio towards more modern, fee-based, flexible products with lower strain and shorter payback periods. This has improved net operational cash generation substantially. We are rebasing our operating costs, mainly through the rationalisation of headcount, and pursuing our strategy to build a low-cost, scalable savings platform.  

New business APE of £448m (H1 2008: £456m) was marginally lower than last year.  New business strain is significantly lower at £44m. 

Operational cash generation and operating profit 

We are moving towards a distribution model which relies less on upfront commission payments and is more focused on trail commissions and fees set by distributors and customers. Initiatives to reduce new business strain and improve cash flow have resulted in a managed reduction in volumes in some product lines.

In particular, in non profit bonds and some legacy retail pension products we have reduced initial commission and simplified our trail commission options.

These actions have improved overall net cash generation to negative £1m in first half of 2009 (FY 2008: negative £23m). This was achieved through a significant reduction in new business strain to £44m (2008: FY £161m) and despite a reduced contribution from the existing book driven by lower assets values and lower income from the With-profits business.

Despite market volatility, overall Savings assets under administration of £46bn have been maintained at 2008 year end levels. Investment market volatility was offset by positive net fund flows of £0.7bn. 

New business strain in the onshore unit linked bond business fell significantly. A materially reduced appetite for this business has contributed to lower commission strain and management actions to reduce infrastructure in line with lower volumes have mitigated pressure on unit costs.

In non profit pensions we have also reduced new business strain through actions on product mix, commission terms and expenses. 

The IFRS operating loss of £5m before tax was partially attributable to a £31m decrease in the income from the with-profits business. This decrease was directly related to actions on bonuses and Market Value Reductions in response to sustained adverse investment conditions. 2008 was also a peak year for maturities. H1 2009 also did not see a repeat of one-off reserving benefits in the Savings business result in H1 2008.

New business

Non profit pensions: APE sales 9% lower at £147m (H1 2008: £162m).

Lower sales reflect a drive to improve the economics of a number of traditional product lines. This has in some areas led to lower volumes, but an overall improvement in the mix and profitability of our portfolio of pension sales.  

Our more modern pension products, including SIPPs, have performed well. SIPP sales grew by 32% in H1 2009 and now represent 68% of all new non profit retail sales. We have capitalised on the acquisition of Suffolk Life in 2008 and have grown in this market, which offers more attractive economics than more traditional pension products.

We have made good progress in providing Group Pensions, including Group SIPP products to corporate clients and new business tender activity remains strong. Our proposition remains focused on fee based intermediaries where we have been successful despite downward pressure on charges for nil commission terms. 84% of non profit corporate pension sales are now made on a fee basis.

Core retail investments: APE sales up 31% to £151m (H1 2008: £115m).

This strong expansion in sales reflects good progress in the distribution of products through Nationwide Building Society, the delivery of a wider range of products to specialist IFAs and increased direct sales.

With-profits products: APE 13% higher at £118m (H1 2008: £104m)

This reflects continued growth of with-profits bond sales which were 182% higher at £31m (H1 2008: £11m). We have increased our with-profits bonds market share reflecting the success of our leading protected capital offering.

Unit linked bonds: APE sales 57% lower at £32m (H1 2008: £75m)

Sales in this market have declined as anticipated reflecting continued adverse market and fiscal conditions and management actions to reduce sales of products incurring higher initial commissions.

Outlook

We will continue to focus on cash generation ahead of sales growth. We are targeting low strain business with lower risk to capital. Overall, we expect further declines in volumes in less economically attractive areas of our pensions and bonds businesses, but aim to continue to grow in business lines where the capital and cash flow dynamics are more favourable.

The actions taken will deliver a better and more profitable mix of business overall. Improvements in non profit new business strain, relative to the level of new business sales, should continue as initiatives to change the focus of our distribution model to trail commissions and fees, as opposed to upfront commission, take fuller effect as the year progresses.

In order to ensure our Savings business is rebased to reflect changes in market conditions and lower volumes, we have embarked on a cost reduction programme during H1 2009. We expect to recognise significant headcount reductions by the end of the year and the full benefits will be realised throughout 2010, positioning the business well for the future.

Business review - Investment management

Investment management includes our institutional investment management business ('LGIM'), and institutional sales of unit trust contracts.

Financial Highlights	H1 2009	FY 2008
Operational cash generation £m	51	115
IFRS operating profit £m	70	165
Gross new fund management mandates £bn	15.1	33.1
Highlights for LGIM
Average fee margin (bp)	10.3	10.6
Average expense margin (bp)	5.5	5.2
Average UK funds under management £bn	268	280
Closing UK funds under management £bn	271	264
Gross new fund management mandates £bn	14.2	30.9
Redemptions £bn	(6.3)	(20.8)
Net fund flows £bn	7.9	10.1

Operational cash generation and operating profit 

Investment management generated operational cash of £51m despite the downturn in market conditions over the last 12 months.  Continued market volatility in 2009 reduced operating profits by 23% to £70m (H1 2008: £91m). Of this total, £12m was generated by the management of assets internal to the Legal & General Group companies.  LGIM's fee to fund ratio of 10.3bp remained resilient, being broadly stable when compared with the 10.6bp delivered in 2008. The expense margin has increased from 5.2bp in 2008 to 5.5bp reflecting the combination of lower average asset balances and continued investment in diversifying our product offering.

New business

Investment management continued a very strong performance in the generation of gross new business, with £15.1bn of new mandates being only modestly lower than last year (H1 2008: £17.6bn). Within LGIM, gross inflows were £14.2bn, with strong net flows of £7.9bn supported by record persistency, retaining 94% of client money despite unsettled market conditions. We are pleased that in such a challenging environment, such strong gross and net fund flows have supported UK funds under management, growing by 3% in the first half to £271bn (FY 2008: £264bn). Particularly encouraging is that LGIM's core index tracking products are increasingly complemented by sales of active bonds and our market leading LDI products. We now have a comprehensive range of LDI funds (both pooled and segregated) resulting in funds under management increasing by 43% to £22.5bn (H1 2008: £15.7bn).

Outlook

LGIM remains a leader in its market and the outlook looks positive, with strong inflows of new business in the pipeline. We continue to evolve the product range and to develop solutions to meet client demands. Under current market conditions, we remain well positioned for significant further progress.

Business review - International 

Financial Highlights £m	H1 2009	FY 2008
IFRS operating profit
- USA	45	39
- Netherlands	16	6
- France	4	14
Total international operating profit	65	59
New business APE
- USA	29	51
- Netherlands	13	29
- France(1)	33	39
Total	75	119

Note: (1) Includes core retail investments

Operating profit 

Total IFRS operating profit was £65m, up 35% (H1 2008: £48m). This reflects the positive impact of strain and expense management in our USA and Netherlands businesses, offset by lower margins in our French business.

Operating profit in the USA rose 50% (H1 2008: £30m), having taken action to reduce expenses and new business strain and benefiting from currency movements.

In the Netherlands the profit turnaround since H1 2008 has been driven by more stable investment markets and focus on expense control in a lower volume environment, which has contributed to lower new business strain.

In France operating profit is lower than the same period of last year due in part to reduced margins on savings products, and the switch away from unit linked products.

New business

In the USA we have taken a measured approach to sales in the first half, preferring to implement selected price rises to improve profitability rather than pursuing higher volumes. However, sales momentum has been maintained despite the difficult trading conditions, with regular premiums of $43m (H1 2008: $47m).

Our Netherlands business continues to operate in very challenging industry conditions. Our unit linked business has been affected by low consumer sentiment. A decline in term sales reflects the downturn in the mortgage market and increased competition during the period. Overall new business APE was 29% lower compared to last year at €15m.

In France our Group Insurance business continues to expand ahead of the market in terms of total premium income despite difficult market and economic conditions. Euro-fund saving new business increased in H1, however customer sentiment towards unit linked savings products was lower. Headline APE was €37m  (H1 2008: €28m).

Outlook

In the USA we expect our performance to remain resilient for the remainder of the year based on our distribution strength and our position as a leader in the individual protection market, despite difficult trading conditions and some signs of increased price competition. Our focus will however remain on margin rather than volume growth.

European markets will continue to be challenging until consumer confidence starts to improve for equity-style investments.  In the Netherlands we have introduced a more sophisticated term insurance pricing approach backed by improved point of sale technology and we expect to see these supporting sales in H2 2009.

In India, we have received the important R1 approval from the Insurance Regulatory and Development Authority (IRDA) for our joint venture with Bank of Baroda and Andhra Bank. This allows us to push ahead aggressively to complete launch preparations and we are on track to launch in the first quarter of 2010. 

Our joint venture in the Gulf has launched with group life and credit life products. Full operations through the retail branches of our partner, Ahli United Bank, will commence in Q4 2009.

Asset portfolio

Shareholders have direct exposure to 10% of total assets under management, or £28bn. The portfolio remains of high quality. Over the half-year period to 30 June 2009 there have been three defaults on our bond portfolio backing the UK non profit annuity business, amounting to £1m, or 0.005% of assets. This is well below our long term default assumption - currently set at 36bp per annum.

In the following table we have separately identified assets backing our UK non profit annuity business within Legal & General Pensions Limited ('LGPL') which represents the majority of our fixed interest exposure:

Asset class £bn	LGPL	Total
Equities	-	0.8
Bonds	18.1	22.2
Derivative assets	0.8	1.7
Property	-	0.2
Cash (including cash equivalents)	1.3	3.1
	20.2	28.0

Equity investments

Shareholders' exposure to UK and overseas equities was £0.8bn as at 30 June 2009 (FY 2008: £1.4bn).  We indicated at the time of the preliminary results that we had disposed of £1.1bn of equities mostly in 2008 and some in 2009.

Bond investments

The following table expands on the credit structure of bond investments to which shareholders are exposed:

Rating band £bn	LGPL	Total
AAA	2.6	4.5
AA	1.8	2.3
A	6.7	7.7
BBB	4.9	5.4
BB or below	0.5	0.6
Not rated (including CDO investments classified as not rated)	1.6	1.7
	18.1	22.2

The credit quality of our portfolio of bonds remains good, with 97% of the rated bonds in investment grade credit. This is a lower proportion than at the year-end, reflecting credit rating downgrades in the period.

In addition we hold approximately £723m of credit default protection on the portfolio.

As we have described in previous statements, we have increased the sector and geographic diversification of our annuity portfolio in the last three years. Exposure to overseas currency and interest rate risk is actively managed through the use of derivative programmes. 59% of the LGPL credit portfolio assets are now domiciled outside the UK including 32% held in North America and 23% in Europe. This compares with 55% domiciled outside the UK as at the end of 2008 and 33% just over three years ago.

Banks securities

We have continued to diversify the portfolio in 2009, actively reducing our exposure to the junior subordinated bonds of UK banks since the start of this year and maintaining our relative underweight position in banks in comparison to both global and local market index weightings.

Details of exposures to non-Senior tierings of bank securities as at 30 June 2009 are summarised below. In aggregate the market value of non-Senior bank debt has reduced by 36% in the UK and 28% worldwide reflecting a combination of market price movements and active disposals:

Tiering £m	UK	North America	Europe	Other	Total
Lower tier 2	737	541	280	81	1,639
Upper tier 2	101	-	46	5	152
Tier 1 (including preference stock)	242	66	84	9	401
	1,080	607	410	95	2,192

Collateralised Debt Obligations ('CDO')

The value of our CDO investments at 30 June 2009 was £1.1bn. This is an increase of 8% compared to year end 2008 resulting from the improvement in credit markets over the period. No further CDO investments were made in the period. Of this total, £0.9bn relates to internally managed CDOs which are super-senior tranches of bespoke structures constructed and managed by Legal & General to provide enhanced yield with significant protection against default. During the period, there were no defaults on the underlying credits in these bespoke portfolios.

Asset Backed Securities ('ABS')

Within our bond portfolio, ABS investments stood at a market value of £3.8bn at 30 June 2009 compared to £3.4bn at the end of 2008. ABS holdings are analysed in detail in the schedules to these results. Our portfolio of ABS investments remains defensive, with the majority of the structured finance exposure to either UK based infrastructure or secured bonds. These are high quality assets that were selected for their quality, long duration and risk diversification.

Within this total, £1.3bn is categorised as traditional ABS investments, including RMBS and CMBS. The average rating of these classes is AAA. We have just £21m of sub-prime RMBS, of which 81% is of AAA quality.

Enquiries

Investors:

Jonathan Maddock        Head of Investor Relations            020 3124 2150
Damian O'Reilly              Investor Relations Manager          020 3124 2151

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://investor.legalandgeneral.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.  UK investors should dial 0800 073 8912 and overseas investors should dial [phone]. The conference ID number is 19788199.

Basis of preparation

The European Union requires all listed companies to prepare their consolidated financial statements using standards issued by the International Accounting Standards Board. The Group's statutory results have therefore been reported on an International Financial Reporting Standards basis. The Group's directors continue to believe that the supplementary accounts prepared using European Embedded Value principles provide shareholders with a good understanding of the value which has been generated by the Group.  

The following financial statements were approved by a sub-committee of the Board on 3 August 2009 and constitute non statutory accounts within the meaning of Section 435 of the Companies Act 2006. The Group's financial statements for the 2008 financial year include the auditors' unqualified report and do not contain a statement under either Sections 498(2) or 498(3) of the Companies Act 2006. 

Financial calendar 2009:

Event	Date
Ex-dividend date	2 September 2009
Payment date for 2009 Interim Dividend (to members registered on 04/09/09)	1 October 2009
Q3 Interim Management Statement 2009	4 November 2009

A Dividend Re-investment Plan is available to shareholders. 

Forward-looking statements

This document may contain certain forward-looking statements with respect to certain of Legal & General Group Plc's (and its subsidiary undertakings') plans and its (and their) current goals and expectations relating to future financial condition, performance and results. By their nature forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Legal & General Group'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 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 Legal & General Group's 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

Legal & General's business involves the controlled acceptance and management of exposures to market, insurance, credit, liquidity and operational risks. In addition to these inherent risks, the following risk factors may impact the Group's strategic objectives, profitability or capital.  

	Business Environment	Risk Factors & Uncertainties
Legislation and Regulation	The financial services markets in which the Group operates are highly regulated. Government fiscal policy also influences product design, business retention and required reserves.	The Group engages with regulatory and legislative authorities to assist in the evaluation of change on the sector and its stakeholders. However, sudden changes and/or retrospection in legislation and fiscal policy without prior consultation, or the differing interpretation and application of regulation over time, may have a detrimental effect on the Group's strategy and profitability.
Financial Market and Economic Conditions	The earnings and profitability of Legal & General's businesses are influenced by a broad range of factors including the performance and liquidity of investment markets, interest rate movements and inflation	The Group uses a range of risk management strategies to manage volatility in returns from investment assets and the broader effects of adverse market conditions. However, extreme market conditions can impact the execution of these strategies. Economic conditions also influence the purchase of financial services products and the period over which business is retained.
Counterparty and Third Party Risks	The Group is exposed to counterparty risk in respect the issuers of corporate debt and financial instruments, and through money market and reassurance transactions. Third party risk arises with regard to critical suppliers.	The Group seeks to limit exposure to loss from counterparty and third party failure through selection criteria, pre-defined risk based limits on concentrations of exposures and monitoring positions. However, in extreme conditions an event causing widespread default may impact the Group's profitability.
UK Financial Services Sector Contagion Risks	As a significant participant in the UK retail financial services sector, the earnings of the Group are influenced by the perception and confidence of the retail investor with the sector as a whole.	The Group seeks to differentiate itself from its competitors, however, factors such as investment market performance, actions by regulators and shock events such as significant market failures can impact the confidence of retail investors. Participation in the Financial Services Compensation Scheme may also impact the Group should financial services organisations fail.
Mortality, Catastrophe and Other Assumption Uncertainties	In writing insurance business the Group uses its pricing capabilities to assess and charge an appropriate premium for known risk factors.	Stress testing is undertaken to validate the key assumptions underpinning long term liabilities and to assess the adequacy of capital. However, scenarios such as a rapid advance in medical science leading to significantly enhanced annuitant longevity or an event causing widespread mortality or morbidity, coupled with a reinsurer default may impact profitability and capital. Extreme shifts in financial markets and in the broader economic environment may also require other assumptions for persistency, valuation interest rates or credit defaults to be recalibrated.
Future Development of Savings Market	The reasons customers save and make provision for old age is influenced by a number of factors including government policy, social conditions and the general economic environment.	Consumer uncertainty in factors influencing the incentive to save may have a detrimental effect on the markets in which the Group operate and potential earnings. A protracted period of low growth in asset values or low interest rate returns, may lead to a re-assessment by consumers of the way they plan for retirement and their requirements for long term saving products.
Resources	The Group's ranges of products include those targeted at specific market segments which require specialist knowledge to design and support.	The Group actively focuses on retaining the best personnel and deploys strategies to ensure that key dependencies do not arise. However, sudden unanticipated loss of teams of expertise may, in the short term, impact certain segments of Legal & General's businesses.

Supplementary EEV disclosure

Financial highlights	PVNBP (£m)		Margin (%)		Contribution (£m)
	H1 2009	H1 2008	H1 2009	H1 2008	H1 2009	H1 2008
Contribution from new business
Protection	427	553	7.0	6.9	30	38
Annuities	1,328	1,776	11.1	7.6	148	135
Unit linked bonds	319	749	(1.6)	(0.5)	(5)	(4)
Pensions - Stakeholder and other non profit	1,007	1,047	(0.4)	(0.2)	(4)	(2)
With-profits savings	734	711	2.2	1.5	16	11
UK (Risk and Savings)	3,815	4,836	4.8	3.7	185	178
International	551	465	2.0	3.5	11	16
Worldwide total	4,366	5,301	4.5	3.7	196	194
Contribution from in-force business - expected return(1)					304	227
UK business in-force variances and assumption changes
- Persistency					(5)	(11)
- Mortality/longevity/morbidity					5	11
- Expenses					(36)	40
- Other					113	(22)
International in-force variances and assumption changes					8	(13)
Total in-force variances and assumption changes					85	5
Development costs					(18)	(22)
Contribution from shareholder net worth(1)					69	160
Operating profit
Risk					460	267
Savings					28	87
Investment management(2)					58	72
International					87	58
Group capital and financing					24	105
Operating profit					657	589
Variation from longer term investment return					(1,019)	(474)
Effect of economic assumption changes					(630)	(12)
Property losses attributable to minority interests					(20)	(13)
(Loss)/profit from ordinary activities before tax					(1,012)	90
(Loss)/profit from ordinary activities after tax					(720)	73
Diluted earnings per share based on operating profit after tax (p)					8.27	6.84
Shareholders' equity					5,556	7,458
Shareholders' equity per share (p)					95	125

Note:

• From full year 2008, the treatment of our internal contingent loan has been changed. Its value and unwind of assumptions are now accounted for as part of the UK in-force results, having been included as part of shareholder net worth in H1 2008.

• From full year 2008, our Pensions Management Company ('PMC') is no longer classified as covered business. As a result it is now reported on an IFRS basis within the EEV results and H1 2008 figures have been restated.

The EEV operating profit of £657m was 12% up year on year (H1 2008: £589m). This includes new business contribution of £196m (H1 2008: £194m) reflecting higher average new business margins and overall positive experience variances and operating assumption changes of £85m (H1 2008: £5m).

The EEV result before tax also includes the effects of economic assumption changes and investment variances totalling negative £1,649m which are discussed below.

New business contribution

Worldwide PVNBP reduced by 18% to £4,366m (H1 2008: £5,301m). This reflects a decrease of 21% in the UK to £3,815m (H1 2008: £4,836m) and an 18% increase in our International businesses.  The worldwide new business margin of 4.5% was higher than the 3.1% at the full year 2008 stage.

Our UK new business margin was 4.8% (FY 2008: 3.1%):

• Protection: margin of 7.0% (FY 2008: 6.2%). This increase reflects changes in mix towards higher margin business and lower expenses. The IRR on new business was 16% with a payback period of 5 years.

• Annuities: margin of 11.1% (FY 2008: 7.4%). The improved pricing conditions noted in the IFRS results analysis above are reflected also in EEV new business margins. Given negative strain on this business in the first half annuities has an immediate IFRS payback and IRR calculations are not applicable.

• Unit linked bonds: margin of negative 1.6% (FY 2008: negative 1.0%). The underlying mix of business and pricing improved in the first half with an increased proportion of Portfolio Bond sales and reduced allocation rates. However this was more than offset by the higher risk discount rate and unit expenses as sales continued to decline. IRR was 6% with a payback period of 9 years.

• Non profit pensions: margin of negative 0.4% (FY 2008: negative 0.4%). The underlying mix of business and pricing effects were positive in the period with a higher proportion of SIPP sales, but this was offset by the higher risk discount rate. IRR was 7% with a payback period of 12 years.

• With-profits: margin of 2.2% (FY 2008: 1.2%). The mix of business has shifted further towards with-profits bonds, improving the margin of business sold in the period.

As a result of these movements, UK new business contribution increased to £185m (H1 2008: £178m; FY 2008: £265m). New business contribution from our International business, at £11m, was lower than the prior year (H1 2008: £16m) with a margin of 2.0% compared to 3.5% in the first half of 2008. This includes the effect of higher risk discount rates in the calculation of EEV results which reduced USA new business contribution.

In-force contribution

The expected return from in-force business increased to £304m (H1 2008: £227m) due to the unwind of a higher discount rate (8.3% vs 7.5%) on a higher opening in-force value.

The contribution from shareholder net worth of £69m decreased from £160m in the prior year. The opening balance of the UK shareholder net worth, at £1,878m for 2009 was materially lower than the opening balance for 2008 at £3,837m.

Experience variances and assumption changes in our UK Risk and Savings businesses of £77m (H1 2008: £18m) included:

• Persistency: negative £5m (H1 2008: negative £11m). Reflects small negative variances from lapse experience in our individual protection business.

• Mortality/morbidity/longevity: £5m (H1 2008: £11m). Reflects better than expected claims in group protection.

• Expenses: negative £36m (H1 2008: positive £40m). Good expense experience in our individual protection business was offset by higher unit costs in our smaller unit linked bonds business and higher investment expenses impacting our annuities business.

• Other: £113m (H1 2008: negative £22m). Reflects predominantly £57m of one off modelling improvements and £39m reflecting a reassessment of future reserve releases as data is loaded onto the BPA system and other reserve releases.

Development costs decreased to £18m (H1 2008: £22m) as expenditure on developments in prior periods reduced or was not repeated in 2009. 

Investment management

From the 2008 preliminary results, the managed pension funds business within Investment management has been reported on an IFRS basis, as management believe IFRS to be the most appropriate reporting basis. H1 2008 comparatives have been restated accordingly. The change in the reporting basis has reduced H1 2008 operating profit before tax by £37m, increased profit after tax by £17m and reduced shareholders' equity by £323m. Investment management operating profit excludes £12m (H1 2008: £19m) 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, Savings and Group capital and financing covered business on an EEV basis. 

Profit before tax

Worldwide operating profit was £657m (H1 2008: £589m). Below the operating line there were negative contributions from investment variances (£1,019m) and economic assumption changes (£630m).

The H1 2009 variation from longer term investment return includes:

• £(511)m variance reflecting the EEV impact of asset allocation decisions made during the period. Of this amount, £(335)m is the EEV impact of swap transactions undertaken to improve the IFRS matching of annuity business which reduced the assumed future yield on the annuity assets for EEV purposes, £(96)m is due to an increased cost of capital arising from de-risking activity to reduce the equity ratio for assets backing solvency capital and £(80)m is the EEV impact of holding additional cash balances, largely to back the short term default provision.

• The remaining amount reflects the EEV impact of investment performance relative to assumptions, including £(228)m due to the sale of corporate credits and holdings in cash during a period when credit spreads have narrowed, £(117)m for Group capital and financing and £(103)m for with-profits business.

Economic assumption changes amounted to negative £630m (H1 2008: negative £12m). This included:

• UK risk discount rate increase by 50bp - negative £221m

• USA risk discount rate increase by 120bp - negative £129m

• Increased cost of capital on increased annuity reserves - negative £119m

• EEV impact of increase in realistic and statutory long term default provision - negative £179m 

Profit on ordinary activities after tax reflects the combination of operating profit with investment effects and economic assumption changes, and was negative £720m, compared to a profit of £73m in H1 2008. After allowing for £120m of dividends paid in the period, shareholders' equity was £5,556m at 30 June 2009, a reduction of 15% from the year end. This translates into embedded value per share of 95p (FY 2008: 111p).

 

END

 

 

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