Interim Management Report 2011

RNS Number : 6217L

Legal & General Group Plc

03 August 2011

 



LEGAL & GENERAL GROUP PLC INTERIM MANAGEMENT REPORT 2011

STOCK EXCHANGE RELEASE

3 AUGUST 2011

Legal & General delivers STRONG GROWTH IN CASH GENERATION AND 25% INCREASE IN INTERIM DIVIDEND.

·      OPERATIONAL CASH GENERATION UP 19% to £498M (H1 2010: £417M)
NET CASH GENERATION UP 14% TO £427M (H1 2010: £373M)

·      INTERIM DIVIDEND UP 25% TO 1.66P PER SHARE (H1 2010: 1.33P PER SHARE)

·      WORLDWIDE SALES UP 4% TO £920M APE (H1 2010: £881M APE)

·      IFRS OPERATING PROFIT £523M (H1 2010: £542M),
IFRS PROFIT BEFORE TAX £473M (H1 2010: £537M)

·      EEV OPERATING PROFIT 12% HIGHER AT £662M (H1 2010: £589M)
EEV PER SHARE UP 5% TO 139P (31/12/2010: 132P)

·      IGD SURPLUS £4.0BN (31/12/2010) £3.7BN)

·      ANNUALISED IFRS RETURN ON EQUITY¹ 14.6% (2010: 18.6%)

Tim Breedon, Group Chief Executive, said:

"In the first half of 2011, Legal & General has continued to deliver on our key metrics.  Continued strong cash generation and confidence in our future prospects has led the Board to increase the interim dividend by a further 25% to 1.66p per share.

"We remain confident in our business model and strategy.  Our leading market positions in UK savings, annuities, protection and asset management are delivering healthy returns for shareholders. Sales volumes continue to grow, and we are developing attractive new businesses both in the UK and internationally. 

"Economic uncertainties remain, volatility continues in financial markets and the life assurance sector is entering a period of significant regulatory change. In these conditions it is prudent to maintain a strong balance sheet.  Our IGD surplus of £4bn provides sufficient capital to exploit opportunities as they emerge, to continue to grow the business and to provide protection from economic and regulatory risks."

RETURNS - DIVIDEND INCREASED BY 25%

	H1 2011	H1 2010
Half year dividend per share (pence)	1.66	1.33
Net cash generation per share (pence)	7.33	6.40
IFRS operating profits earnings after tax per share (pence) (basic)	6.69	6.73
IFRS earnings per share (pence) (basic)	6.16	6.90
Average number of shares (m)	5,828	5,827

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

KEY PERFORMANCES INDICATORS

OPERATIONAL CASH GENERATION¹ UP 19% TO £498M,
NET CASH GENERATION UP 14% TO £427M

H1 2011 £m	Risk	Savings	Inv Mgmt	International	Group & capital financing	Group projects	H1 2011
Operational cash generation	233	89	91	35	50	-	498
New business strain	(40)	(31)	-	-	-	-	(71)
Net cash generation	193	58	91	35	50	-	427
IFRS Operating profit	236	68	117	66	61	(25)	523

H1 2010 £m	Risk	Savings	Inv Mgmt	International	Group & capital financing	Group projects	H1 2010
Operational cash generation	212	72	70	33	30	-	417
New business strain	(10)	(34)	-	-	-	-	(44)
Net cash generation	202	38	70	33	30	-	373
IFRS Operating profit	310	54	98	61	33	(14)	542

ASSETS - £362bn in LGIM, £66bn on Savings, £25bn in Annuities

£bn	H1 2011	H1 2010
LGIM2	362	320
Savings	66	56
Annuities	25	24

EEV Results - Embedded Value per Share up to 139p

£m	H1 2011	H1 2010
Worldwide PVNBP	3,899	3,880
Worldwide new business margin (%)	3.5	4.1
EEV Operating profit	662	589
EEV Profit after tax3	606	422
Number of shares (m)	5,871	5,866
Shareholders' equity	8,147	6,958
Equity per share (pence)	138.8	118.6

1. Net cash generation is defined as operational cash generation less new business strain for the UK non profit Risk and Savings businesses.

Operational cash generation is defined as the expected release from in-force business for the UK non profit Risk and Savings businesses, the shareholders' share of bonuses on with-profits business, the post-tax IFRS operating profit on other UK businesses, including the group capital and financing segment, and dividends remitted from our international businesses from sustainable cash generation. The operational cash generation definition for group capital and financing segment is now consistent with IFRS operating profit definition and includes expected gains/losses on equities. This change has no impact on IFRS operating profit but has increased operational cash generation by £18m (H1 10: £15m, FY 10: £32m)

2. Includes Annuities and some Savings assets.

3. Includes £155m relating to change in UK corporation tax rates

GROUP RESULTS

£m	H1 2011	H1 2010
Operational cash generation	498	417
New business strain	(71)	(44)
Net cash generation	427	373
IFRS
Risk	236	310
Savings	68	54
Investment Management	117	98
International	66	61
Group capital and financing	61	33
Investment projects	(25)	(14)
Operating profit	523	542
Variation from longer term investment return	(49)	(4)
Property losses attributable to non-controlling interests	(1)	(1)
Profit before income tax	473	537

OPERATIONAL CASH GENERATION UP 19%, NET CASH GENERATION UP 14%

Further, strong progress in cash generation.		In H1 2011, the Group delivered a 19% increase in operational cash generation to £498m (H1 2010: £417m).  Net cash generation was up 14% to £427m (H1 2010: £373m) despite a further reduction in positive annuity strain from £35m in H1 2010 to £1m in H1 2011.  This effect was offset by strong growth in operational cash generation from protection (up 14%), savings (up 24%), LGIM (up 30%) and group capital and financing (up 67%).

IFRS OPERATING PROFIT £523M (H1 2010: £542M)

Continued growth in risk business offsetting negative headwinds.		IFRS operating profit in Risk was down to £236m, largely due to a reduction in the positive new business strain in annuities (H1 2011: £1m, H1 2010: £35m), an increase in claims in Group protection and the non recurrence of positive inflation modelling effects seen in H1 2010. Annuity assets grew 6% as the slow start for sales in Q1 (APE: £24m) was reversed in Q2 (APE: £52m).  Housing and protection gross premiums grew 2% with higher new business volumes achieved despite continued challenging markets.
Record assets, sales, cash and profits in Savings.		Savings operating profit of £68m was up 26% (H1 2010: £54m) and net cash generation was up 53% to £58m (H1 2010: £38m).  We have continued to improve returns from this business whilst accelerating growth in new business APE, up 9% to £662m (H1 2010: £609m).   Net new funds were £1.1bn (H1 2010: £1.5bn) and assets under administration are 18% higher at £66bn (H1 2010: £56bn).
Another record six months for profits in LGIM.		LGIM delivered another record half year operating profit of £117m (H1 2010: £98m).  LGIM's international expansion continued with £3.2bn of new business from overseas clients. Total gross new business was £17.9bn and net new business was £3.0bn (H1 2010: £8.3bn). Funds under management grew 13% to £362bn (30/06/10: £320bn) and margins further improved. Net cash generation from LGIM improved by 30% to £91m (H1 2010: £70m).
Higher sales, profit and dividend from US business.		The US business paid an increased dividend of £34m (H1 2010: £33m, H1 2009: nil).  International generated £66m of operating profit (H1 2010: £61m) and £88m of new business APE (H1 2010: £81m).
Increased shareholder funds improving returns.		As group capital and financing assets (excluding derivatives) increased to £4.1bn (30/06/10 £3.1bn), the income from these funds boosted profits in the group capital and financing area to £61m (H1 2010: £33m).  This also led to an increase in net cash generation to £50m (H1 2010: £30m).
Shareholders equity up 12% to 85p per share.		Below operating profit, weak investment markets led to negative investment variances of £49m (H1 2010: negative £4m). Reflecting this, post-tax profits were lower at £358m (H1 2010: £401m). Shareholders' equity increased by 12% to £5.0bn (H1 2010: £4.5bn) equating to 85p per share (H1 2010: 76p per share).

INTERIM DIVIDEND INCREASED BY 25% TO 1.66 PENCE PER SHARE

Interim dividend raised by 25%.		Continued strong operational cash and net cash generation, coupled with the Board's confidence in the prospects for further growth for the business, underpin the decision to recommend an 25% increase in the interim dividend to 1.66p (H1 2010: 1.33p) per share at a cost of £97m (H1 2010: £78m).
Cash cover to fall to two times in the medium term		The Board intends to reduce net cash generation coverage of the dividend to two times in the medium term.  Thereafter, further reductions in the net cash generation coverage ratio are possible, depending on prevailing economic and regulatory conditions.

STRATEGY AND OUTLOOK

Our strategy continues to deliver…		These results demonstrate a further period of delivery from our strategy of focusing on markets where we have expertise and scale, with the aim of delivering superior returns on capital and high quality, sustainable operational cash generation.
Market leading UK businesses with scale and operational leverage.		We have market leading positions in annuities, protection, savings and asset management in the UK.  All of our businesses have the scale necessary to be competitive.  In each of our key markets we have strong market share positions.  We benefit from the significant economies and operational leverage which scale provides.  As we continue to grow the stock of assets and premiums in these businesses, we expect returns to improve.
Sustainable and predictable cashflow.		Future cash flows are both sustainable and predictable.  We have built a strong pipeline of future cash flow in our risk and savings business where the value of in-force business continues to increase, and in our asset management business where customer loyalty is strong.
The UK is an attractive market for us….		The UK market is attractive.  A combination of an ageing population, increasing savings rates, de-risking amongst pension trustees and retrenchment of the welfare state will continue to drive demand across our risk, savings and investment management model.
….and we are selectively exporting expertise into attractive markets.		Furthermore, we are exporting our expertise into new markets.  In the last three years we have established bancassurance joint ventures in India and in the Gulf, a fixed income asset management operation in the USA, and have increased the international new business franchise of LGIM substantially.  Our international strategy is to be highly selective, targeting attractive markets where we can deploy our experience and established capabilities in pursuit of profitable growth.
Aim to continue to grow profits, cash and dividend.		We remain very confident about the prospects for the Group.  We aim to continue to grow earnings and cash generation and plan for a higher proportion of our cash generation to be passed to shareholders as economic and regulatory uncertainties recede.

BUSINESS REVIEW - RISK

Financial Highlights  £m	H1 2011	H1 2010
Operational cash generation	233	212
New business strain	(40)	(10)
Net cash generation	193	202
Experience variances, assumption changes, tax and other variances	43	108
IFRS Operating profit	236	310
Investment variances	15	112
IFRS profit before income tax attributable to equity holders	251	422

Operational cash generation up 10%, net cash generation of £193m lower as strain normalises in annuities.		In H1 2011, the Risk division increased operational cash generation by 10% to £233m (H1 2010: £212m).  Net cash generation was £193m (H1 2010: £202m) as new business strain in annuities reduced as exceptional pricing conditions continue to normalise. Operating profit was £236m (H1 2010: £310m) reflecting this reduced positive new business strain in annuities, a lower level of positive assumption changes compared with H1 2010, and the impact of higher than expected claims in the Group Protection business.  IFRS profit before tax was £251m with a contribution from investment variances of £15m.
L&G: A market leader in annuities and protection		The Risk division has leading positions in a number of 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 the financial consequences of personal or employee risk (housing & protection).

ANNUITIES

Financial Highlights  £m	H1 2011	H1 2010
Operational cash generation	112	106
New business strain	1	35
Net cash generation	113	141
Individual annuity new business APE	52	61
Bulk annuity new business APE	24	45
Total annuity new business APE	76	106
Annuity assets under administration (£bn)	25.4	23.9
Non profit annuity earned net interest margin (bps per annum)1	100	117
Annuities EEV margin (%)	8.4	10.8

1. Annualised rate of shareholders return from existing assets

Net cash generation of £113m in H1 2011.  New business strain of £1m.		Operational cash generation was up 6% at £112m (H1 2010: £106m) with an earned net interest margin on assets of 100bps per annum.  Net cash generation of £113m reflects reduced new business strain at positive £1m (H1 2010: positive £35m).  The high levels of positive new business strain we have seen in recent years were not repeated in H1 2011.  Annuity assets under management further increased to £25.4bn.
Individual annuities continuing to benefit from distribution relationships.		Annuity APE of £76m was higher in Q2 (£52m APE) than in Q1 (£24m APE).  Individual annuity APE of £52m in the first half was lower than 2010 (H1 2010: £61m). However, comparisons are skewed by the strong individual annuity market in H1 2010 arising from the change in minimum retirement age.  We continue to benefit from the flow of annuitants from our own pensions business as well as our distribution deals with Zurich FS and SAGA.  In the open market, pricing conditions were more favourable in Q2 which allowed us to grow volumes whilst continuing to exceed return on capital thresholds.
BPA market remains quiet but strong quote pipeline in small and large schemes		In the BPA market we wrote 45 schemes worth £24m APE (H1 2010: 57 schemes worth £45m).   The first half remained a relatively quiet period for BPA although the quote pipeline remains strong.  We continue to offer prices on all schemes tendering in the market, irrespective of scheme size, with a strong focus on meeting return on economic capital thresholds.  Historically this has been achieved through focusing on the smaller end of the market where we have developed a market-leading position. However we remain interested in larger schemes where liability characteristics and available returns on capital appear attractive.  We are actively pursuing opportunities within the longevity insurance market, although the emergence of this market continues to be slow.

HOUSING & PROTECTION

Financial Highlights  £m	H1 2011	H1 2010
Operational cash generation	121	106
New business strain	(41)	(45)
Net cash generation	80	61
Protection new business APE	94	85
Protection new business EEV margin (%)	6.4	6.0
Protection gross premiums	614	610
General Insurance gross premiums	146	134
Total gross premiums	760	744
General Insurance new business premiums	54	35
General Insurance combined operating ratio (%)	90	90

Net cash up 31% to £80m		Operational cash generation of £121m was up 14% on 2010 (H1 2010: £106m).  New business strain was £41m (H1 2010: £45m) representing 44% of new business APE (H1 2010: 53%).  The business continues to grow with a 2% increase in gross premiums to £760m (H1 2010: £744m).
Individual protection APE up 14% Group protection sales up 4% Total protection margin increased to 6.4%.		In individual protection, gross premiums grew 3% to £447m (H1 2010: £435m) as a result of new business sales of £65m (H1 2010: £57m).  Progress continues in our strategy of diversification into more specialist higher margin areas of the market with 17% growth in business protection, 22% growth in high net worth protection and 48% growth in direct business.  Despite a weak housing market, we have grown our housing related business with an estimated 17% share of the intermediated mortgage market (H1 2010: 13.5%) leading to stable volumes of housing related protection and general insurance sales. In group protection, in a competitive market, we grew sales by 4% to £29m APE (H1 2010: £28m) as a result of the combination of securing new business and retaining existing schemes. Total protection new business margins increased to 6.4% (H1 2010: 6.0%).
General insurance returns to profitability		In general insurance, performance was good with operating profit of £17m (H1 2010: £14m) and net cash generation of £12m (H1 2010: £10m).  A combined operating ratio of 90% (H1 2010: 90%, FY 2010 106%) primarily resulted from a return to more normal weather conditions in the UK compared with the second half of 2010.

BUSINESS REVIEW - SAVINGS

Financial Highlights  £m	H1 2011	H1 2010
Operational cash generation	89	72
New business strain	(31)	(34)
Net cash generation	58	38
Experience variance, assumption changes, tax and other variances	10	16
IFRS Operating profit	68	54
Investment variance	(2)	(16)
IFRS profit before income tax attributable to equity holders	66	38
Savings new business APE	662	609
Assets under administration (£bn)	66	56
Net new funds (£bn)	1.1	1.5
New business strain % PVNBP	2.6	3.1

Record profits and cash generation

The continued success of the Savings strategy, focusing on asset accumulation, selling capital light products and improving operational efficiency, resulted in a 53% increase in net cash generation to £58m (H1 2010: £38m), an increase of 26% to £68m in IFRS operating profit (H1 2010: £54m).  Investment variances were small at negative £2m (H1 2010: negative £16m) leading to IFRS profit before tax of £66m (H1 2010: £38m).

SAVINGS INVESTMENTS

Net cash generation of £12m		Savings Investments comprises unit trusts and ISAs, structured products, our platform business and uninsured SIPPs (including Suffolk Life).  In total, these businesses delivered net cash generation of £12m (H1 2010: £13m) and delivered IFRS operating profit of £13m (H1 2010: £14m).
Assets up 9% to £25bn		This has largely been achieved by growing assets under administration by 9% to £25.4bn (31/12/10: £23.3bn) through a combination of strong fund flows and market movements.  In addition we have improved operational efficiency as the scale of the business has increased, while investing in our platform capabilities during the year.
APE up 8% to £371m, net new business of £1.7bn Platform assets of £3.3bn		New business APE grew by 8% in H1 2011 to £371m (H1 2010: £343m).  Unit Trusts and ISAs grew by 11% to £157m (H1 2010: £141m) with an increase in applications from customers attracted to our funds proposition and performance.  Sales on our platform, IPS, increased 71% to £106m (H1 2010: £62m) and contributed 16% of the total Savings APE (H1 2010: 10%).  Net new business flows were £1.7bn whilst gross new business was £3.5bn.  We continue to grow assets on our platform, IPS, which has £3.3bn of assets under administration (FY 2010 2.6bn).

Asset movements £bn	Total
Assets under administration (at 1 January 2011)	23.3
Gross new business	3.5
Redemptions	(1.8)
Net new business	1.7
Market movements and other	0.4
Assets under administration (at 30 June 2011)	25.4

INSURED SAVINGS

Substantial increase in IFRS profits and cash contribution		The Insured Savings business includes workplace pensions, individual pensions, insured bonds and international bonds.  The business contributed £20m net cash generation in H1 2011 (H1 2010: £2m).  IFRS operating profit has increased by 150% to £20m in H1 2011 (H1 2010: £8m).  Operational cash generation was up 42% to £51m (H1 2010: £36m).  New business strain was down to £31m (H1 2010: £34m) despite new business APE increasing 16% to £220m.  New business strain as a percentage of PVNBP has improved further to 2.6% (H1 2010 3.1%).
Major scheme wins in workplace pensions driving scale in customer numbers and AUM		Continuing success of our workplace pensions business drove non profit pensions new business APE to £159m (H1 2010: £146m).  We have seen strong interest in our auto-enrolment solutions which have been selected by several major employers including Marks & Spencer.  We have also been chosen as replacement provider for Threadneedle defined contribution customers.  We expect momentum to increase as we approach the first auto-enrolment staging dates.  At the end of H1 2011, workplace pension assets increased to £7.8bn (H1 2010: £6.3bn), representing further progress towards our targeted scale.
Bonds new business up 39%.		Insured bonds new business APE grew by 39% to £61m (H1 2010: £44m) driven by success in International Bonds particularly through our banking channels. Onshore bonds sales have stabilised in the year after declining following tax changes in 2007 which led to reduced customer appetite.
EEV margins continuing to improve		Non profit pensions margin increased to 0.2% (H1 2010: negative 0.1%) and non profit bonds to 1.6% (H1 2010: 0.7%) benefiting from a further shift in new business mix towards capital light products.

Asset movements £bn	Total
Assets under administration (at 1 January 2011)	18.7
Gross new business	1.3
Redemptions	(1.1)
Net new business	0.2
Market movements	0.3
Assets under administration (at 30 June 2011)	19.2

WITH-PROFITS SAVINGS

Growth in cash and IFRS profits.

With-profits Savings comprise all products sold in the with-profits fund, including with-profits pensions and with-profits bonds.  IFRS operating profit, representing the shareholders' share of the with-profits bonus, was up 9% in H1 2011 at £35m (H1 2010: £32m) with net cash generation of £26m (H1 2010: £23m). New business APE has fallen by 7% from £76m in H1 2010 to £71m in H1 2011.

Asset movements £bn	Total
Assets under administration (at 1 January 2011)	22.1
Gross new business	0.6
Redemptions	(1.4)
Net new business	(0.8)
Market movements	0.3
Assets under administration (at 30 June 2011)	21.6

BUSINESS REVIEW - INVESTMENT MANAGEMENT

Financial highlights £m	H1 2011	H1 2010
Total revenue	205	182
Total costs	(88)	(84)
IFRS profit before tax	117	98
Net cash generation	91	70
Average ad valorem fee margin (bps)	10.9	10.6
Average expense margin (bps)	5.2	5.5
Gross new fund management mandates (£bn)	17.9	21.2
Net new fund management mandates (£bn)	3.0	8.3
Closing funds under management (£bn)	362	320

Record profits, cash generation and AUM.		LGIM delivered another record six month IFRS operating profit in H1 2011 up 19% to £117m (H1 2010: £98m). Strong fund performance coupled with high quality customer service resulted in good persistency and net fund flows of £3.0bn. Along with higher market levels, this helped assets under management rise to £362bn (H1 2010: £320bn) with an increase in funds across most asset classes. Margins improved due to a higher fee to fund ratio and continued focus on cost control.  Net cash generation of £91m (H1 2010: £70m) increased by 30% and benefits from the increase in IFRS profit coupled with a lower effective tax rate.
Pension fund de-risking continues to drive demand for LGIM's products.		A core part of LGIM's UK business focus is on providing investment solutions for defined benefit pension schemes which are increasingly looking to de-risk. Our ability to deliver consistent positive passive fund tracking, strong fixed interest performance and innovative LDI (Liability Driven Investment) solutions, the principal building blocks for de-risking strategies, is resulting in healthy new fund flows. Gross UK flows were £14.7bn (H1 2010 £18.8bn).  LGIM's LDI assets grew 19% to £44.9bn (H1 2010: £37.6bn), despite the current market environment placing constraints on the ability to fully execute these de-risking strategies. In addition to new fund flows, further UK business revenue growth was generated from the trend of index fund clients to move assets out of the more mature markets into emerging economies.
International Diversification gaining momentum.		LGIM's strategy to diversify into international markets to generate growth has seen new mandates won in the USA, Middle East and Europe. International gross new business of £3.2bn represents 18% of the total new fund flows compared with £2.4bn or 15% in H1 2010. LGIM's internationally sourced assets now stand at £17.3bn, up 53% over the period from H1 2010 (£11.3bn).

Asset movements £bn	Index	Active	Total
Funds under management (at 1 January 2011)	228.5	125.0	353.5
Gross inflows	13.0	4.9	17.9
Gross outflows	(12.6)	(2.3)	(14.9)
Net flows	0.4	2.6	3.0
Market and other movements*	3.9	2.0	5.9
Funds under management (at 30 June 2011)	232.8	129.6	362.4

*includes movements in internal clients funds

INDEX FUNDS

Continued positive net flows into index funds

The performance of the index business is built on market leading index tracking performance, excellent customer service and good cost control.  This has resulted in sustained, strong new business flows and high persistency helping index assets under management to increase 15% to £232.8bn at June 2011 (H1 2010: £202.0bn). Outflows of £12.9bn reflect payments to pensioners and client losses.

Asset movements £bn	UK equities	Int'l  equities	Fixed Interest	Total - Index
Funds under management (at 1 January 2011)	72.0	86.0	70.5	228.5
Gross inflows	2.5	5.5	4.9	12.9
Gross outflows	(3.9)	(5.3)	(3.3)	(12.5)
Net flows	(1.4)	0.2	1.6	0.4
Market and other movements*	(1.0)	1.1	3.8	3.9
Funds under management (at 30 June 2011)	69.6	87.3	75.9	232.8

 *includes movements in internal clients funds

LDI AND ACTIVE FUNDS

De-risking driving demand for LDI and active fixed income		Fixed income fund performance remains consistently strong with 89% and 92% of funds outperforming their respective benchmarks over 1 and 3 years, to the end of June 2011. This excellent performance is attracting new business mandates, with gross fixed income inflows of £2.1bn (H1 2010: £1.9bn). Momentum is building in our US office which experienced strong gross inflows of £0.9bn in H1 2011 (H1 2010: £0.1bn). Legal & General Property (LGIM's property business) continues to perform well and has increased assets under management. LGP is the UK's third largest institutional property investor by assets under management.
Asset movements £bn			Equities	Fixed Interest	Property & other	LDI	Total - active
Funds under management (at 1 January 2011)			9.1	66.6	8.5	40.8	125.0
Gross inflows			-	2.1	0.1	2.7	4.9
Gross outflows			-	(1.5)	-	(0.8)	(2.3)
Net flows			-	0.6	0.1	1.9	2.6
Market and other movements*			(0.3)	-	0.1	2.2	2.0
Funds under management (at 30 June 2011)			8.8	67.2	8.7	44.9	129.6

*includes movements in internal clients funds

BUSINESS REVIEW - INTERNATIONAL

Financial Highlights £m	H1 2011	H1 2010
Operating Profit
USA	50	44
Europe (Netherlands and France)	18	21
Middle East and Asia (Egypt, the Gulf and India)1	(2)	(4)
IFRS profit before tax	66	61
New business APE	88	81
Operational cash generation	35	33

1. Includes divisional head office costs.

TRADING PERFORMANCE AND OPERATING PROFIT

Operating profit up 8%, new business up 9%		International operating profits were up 8% at £66m (H1 2010: £61m). New business growth of 9% was driven by a strong performance in the US.  New business margins rose in H1 2011 in the US, as a consequence of increasing reinvestment yields and the impact of improving new business levels on expense recovery.
Growth in US dividends and £52m capital repatriation		Operational cash generation by International division was £35m (H1 2010: £33m), representing 10% growth in the underlying dividend from the US in local currency terms. These underlying dividend flows are expected to continue and grow in future years. We also expect dividends from Europe in the second half.  In addition, the US business remitted £52m (H1 2010: £nil) of capital representing repatriation of the profits in 2010 from redemption of external debt in February.

LEGAL & GENERAL AMERICA (LGA)

Financial Highlights $m	H1 2011	H1 2010
IFRS Operating profit	81	67
IFRS profit before tax	80	67
New business APE	52	33
Gross premium income	403	384
Net cash generation	55	50
New business margin (%)	9.8	1.4
Embedded value	1,514	1,504

Growth in profits, sales and new business margins.		In H1 2011, US operating profits of $81m (H1 2010: $67m) were 21% higher in local currency terms due to investment profits, strong sales growth and improved mortality experience.  New business of $52m (H1 2010: $33m) was 58% higher in local currency terms as management supplemented last year's pricing action with action on distribution.  Encouragingly, new business was 11% higher than in H2 2010. New business margins rose sharply as a result of the significant increase in volume, with its effect on expense recovery and increasing reinvestment yields.
First two phases of capital programme complete.		We have completed the first two phases of our US capital management programme.  Phase One was announced in February and involved the reinsurance of a tranche of triple-X reserves back to the UK and associated repurchase of externally financed securities.  Phase Two involved the establishment of an internally financed triple-X structure for new business written in 2011 and subsequent years.  Whilst this has not led to capital repatriation, it creates a structure which avoids the build up of redundant reserves in LGA.  The work on subsequent phases of the programme is continuing.

LEGAL & GENERAL EUROPE

Financial Highlights €m	H1 2011	H1 2010
IFRS operating profit	21	24
IFRS profit before tax	27	53
New business APE	55	55
Gross premium income	369	381
Net cash generation	1	1
New business margin (%)	0.6	2.1
Embedded value	648	643

Operating profit of €21m		In Europe, IFRS operating profits were €21m (H1 2010: €24m). Our European business comprises two operations: Legal & General Netherlands and Legal & General France.
Dutch profits down, new business of €9m		In the Netherlands, profits slipped from the exceptional levels in H1 2010, which benefited from profit on rapidly declining yields on bonds. At the same time, results were impacted by high levels of product development expenditure as the business seeks to shift emphasis away from the unit linked life assurance savings market.  New business in the Netherlands was €9m (H1 2010: €12m), due to lower term and single premium sales.  The Netherlands remains a very difficult market with reduced new business volumes and high levels of regulatory change.
French profits up, new business of €46.		Profits in France have improved, due to higher investment profits which offset adverse claims experience on group business.  New business in France totalled €46m (H1 2010: €43m) representing 7% growth, due to increasing levels of Group new business, which consists of life, health and disability products sold to small and medium sized businesses.

EMERGING MARKETS

Emerging market strategy progressing well		We continue to make modest investments in our developing emerging markets joint venture businesses, in India, Egypt and the Gulf states, where we are encouraged by progress after the political instability earlier this year.  We have now obtained regulatory approval to open a representative office in China.
IndiaFirst continues to exceed expectations.		Our bancassurance joint venture in India, IndiaFirst, had a solid half year of operation.  IndiaFirst has sold 50,000 policies to individual clients in the half year, taking the total since launch in late 2009 to nearly 200,000.  New business APE in H1 2011 totalled R1,228m, equivalent to £17m, of which L&G's share was £4m.

BUSINESS REVIEW - GROUP

GROUP CAPITAL AND FINANCING

Financial Highlights £m	H1 2011	H1 2010
Closing group capital and financing shareholder funds	4,369	3,252
Closing outstanding debt balances	2,742	2,565
Investment return	100	72
Interest expense	(50)	(42)
Total operational cash generation	50	30
Investment return	130	96
Interest expense	(62)	(59)
Investment expenses and unallocated corporate expenses	(7)	(4)
IFRS profit before tax	61	33

Cash generation leading to increase in shareholder funds…		The group capital and financing operating profit primarily reflects the smoothed investment return on shareholders' assets held at Group level and in the long term Risk and Savings businesses less interest charges on Group debt.  Whilst there is no change to the definition of IFRS operating profit, in 2011 we changed the definition of group capital and financing operational cash generation to include the assumed capital appreciation on equity holdings in our cash flow definition.  This puts the treatment of equities on the same basis with other asset classes and brings us more in line with other companies in our sector.
….with higher smoothed investment returns….		As a result of the strong cash generation of the Group, coupled with capital management activities in the USA, shareholder funds have risen during the period.  At 30 June 2011, shareholder funds totalled £4.1bn (31/12/10: £3.3bn).  The average balance of invested assets was £3.8bn (H1 2010: £3.2bn). Smoothed investment return was £130m (H1 2010: £96m) and is calculated by applying an average smoothed investment return of 3.4% (H1 2010: 3.0%).
….whilst debt costs remain flat.		Interest expense of £62m (H1 2010: £59m) reflects the average cost of debt of 4.8% per annum (H1 2010: 4.9% per annum) on average debt balances of £2.6bn (H1 2010: £2.4bn).

VARIATION FROM LONGER TERM INVESTMENT RETURN

£m	H1 2011	H1 2010
Operating profit	523	542
Variation from longer term investment return	(49)	(4)
Property losses attributable to non-controlling interests	(1)	(1)
Profit from ordinary activities before tax	473	537

Negative investment variance in group capital and financing.

Below the operating profit line, the H1 2011 investment variance was negative £49m (H1 2010: negative £4m).  The negative variance of £49m is primarily due to underperformance of Society assets against assumptions, reflecting weaker investment markets and mark to market movement in debt related swaps.

TAX

	H1 2011			H1 2010
	Profit before tax £m	Tax £m	Effective tax rate (%)1	Profit before tax £m	Tax £m	Effective tax rate (%)1
IFRS operating profit	523	(133)	25.4	542	(150)	27.7
Variation from longer term investment return	(49)	22		(4)	14
Property losses attributable to minority interests	(1)	-		(1)	-
Impact of change in UK tax rates	-	(4)		-	-
IFRS profit before tax	473	(115)	24.3	537	(136)	25.3

1.     The Group's standard rate of corporation tax applicable for the period is 26.5% (H1 2010: 28%).

The equity holders' effective tax rate on operating profit is 25.4% compared to 27.7% in the equivalent period last year. The effective tax rate on IFRS profit reduced from 25.3% to 24.3%.  The decrease in the effective tax rate is mainly due to the reduction in the applicable rate of corporation tax to 26.5% (H1 2010: 28%) and also due to recognition of a previously unrecognised deferred tax asset of £12m. 

Deferred tax asset utilisation

The table below provides a breakdown of the key component parts of the IFRS net deferred tax asset of £104m (H1 2010: £365m).

£m	H1 2011	H1 2010
Excess and deferred expenses (XSE)	274	249
Capital losses	30	302
Trading losses	209	275
Other	(36)	(103)
UK net deferred tax asset	477	723
Overseas deferred tax liability	(373)	(358)
IFRS net deferred tax asset	104	365

The utilisation of trading losses is reflected within net cash and has contributed £33m in H1 2011 (H1 2010: £40m). The expected date that the deferred tax asset recognised for trading losses will be fully utilised has been extended from 2012 to 2013.

Change in UK corporation tax rates - impact on VIF (discounted and undiscounted)

The Government have made clear their commitment to reduce corporation tax rates to 23% by 2014.  As the 2% rate reduction in 2011 and further 1% reduction in 2012 have already been enacted, we are confident that the Government will deliver the proposed rate changes as announced.  As such, our best estimate of the applicable tax rates are those which were announced on Budget day and we have reflected the stepped rate change to 23% in our EEV as at H1 2011. This has given rise to a £155m benefit to discounted VIF and a £334m benefit to undiscounted VIF.

BUSINESS REVIEW - CASH GENERATION

SOURCES OF CASH GENERATION

The Group benefits from a range of diversified sources of operational cash generation:

£m		H1 2011 Operational cash generation	H1 2011 New business strain	H1 2011 Net Cash Generation	FY 2010 Operational Cash Generation	FY 2010 New Business strain	FY 2010 Net cash generation
UK long term annuities		112	1	113	229	60	289
UK long term protection		109	(41)	68	216	(70)	146
UK long term non profit savings		53	(31)	22	77	(70)	7
UK long term Risk & Savings		274	(71)	203	522	(80)	442
UK long term with-profits savings		26		26	46		46
	General insurance	12		12	(6)		(6)
	Savings investments	10		10	15		15
Other UK risk and savings		22		22	9		9
LGIM		91		91	162		162
International		35		35	44		44
Group capital & financing
	Return on assets	100		50	152		57
	Interest expense	(50)			(95)
Group total		498	(71)	427	840	(80)	760

1.  UK long term risk and saving business

The UK long term Risk and Savings businesses comprise annuities, protection, pensions and bonds written in the non profit and with-profits funds.  At the end of June 2011, the value of the future undiscounted cashflows in the in-force UK long term Risk and Savings businesses was £8.7bn (31/12/10: £8.0bn).  Excluding experience and investment variances, this value monetises and is released into surplus each year with reasonable certainty and forms the basis of the Group's operational cash generation.  The estimated monetisation profile of the VIF is provided below.

Estimated monetisation of UK VIF (undiscounted)1 £m	2011	2012	2011 - 2015	2016 - 2021	Beyond 2021
UK Annuities	250
UK protection	270
UK non profit savings	100
Total non profit	620
With-profits	70
UK VIF monetisation	690	630	33%	20%	47%

1.     Management estimates at 31/12/10.

The table overleaf demonstrates how the VIF is being replaced by the new business written in the period and illustrates the movements between the opening and closing UK long term Risk and Savings VIF. 

The contribution to VIF from new business written in H1 2011 coupled with the unwind of the discount rate (resulting as cash flows from new business written in previous periods are closer to the balance sheet date) exceed the expected releases from the non profit and with-profits businesses.

Reconciliation of UK long term Risk and Savings VIF £bn	Discounted1	Undiscounted
Opening VIF at 1 January 2011	3.89	8.0
Contribution from new business	0.16	0.3
Unwind of discount rate	0.15	n/a
Expected release from non profit and with-profits businesses	(0.30)	(0.3)
Closing operational VIF at 30 June 2011	3.90	8.0
Experience variances / assumption changes	0.06	0.2
Investment variance / economic assumption changes	(0.02)	0.2
Other2	0.14	0.3
Closing VIF at 30 June 2011	4.08	8.7

1. After cost of capital.

2. Includes the effect of UK budget changes of £0.15bn (discounted) and £0.3bn (undiscounted).

The Group has once again grown the VIF on both a discounted and undiscounted basis in H1 2011. 

2.     other UK risk and savings businesses

Other UK Risk and Savings operational cash generation is primarily generated by the general insurance (Risk) and Savings investments businesses.  In H1 2011, the general insurance business delivered strong profitability of £17m and a positive cash contribution of £12m at a combined operating ratio of 90%. 

The Savings Investments business which comprises unit trusts, ISAs, platform business and structured products increased sales by 8%.  This resulted in cash generation of £12m (H1 2010: £13m). 

3.   LGIM

LGIM's contribution to operational cash generation is defined as operating profit after tax.  This contribution has grown consistently as funds under management have increased from strong net fund inflows and good client persistency.  Further increases in funds under management as the business diversifies into new asset classes and into international markets will help to further grow profits and cash.

Within the calculation of Group embedded value, investment management profits on internally sourced business is included in Group embedded value on a look through basis at £0.2bn (31/12/10: £0.2bn) equivalent to 3p per share.  The external funds element of the investment management business is included at net asset value of £0.4bn (31/12/10: £0.3bn), equivalent to 7p per share (31/12/10: 6p per share).  Calculating the external funds element of LGIM on a discounted cash flow basis, using assumptions detailed below, would increase the contribution of LGIM to Group Embedded value from £0.6bn (10p per share) to £1.8bn (31p per share).  This excludes any value for LGIM's new business franchise.

Estimated LGIM discounted cash flow valuation	H1 2011 (p per share)	H1 2011 £bn
Look through value of profits on covered business	3	0.2
Net asset value	7	0.4
Current value of LGIM in Group embedded value	10	0.6
LGIM VIF (assuming stable margins and 10% outflows per annum)	21	1.2
Alternative discounted value of LGIM future cash flows	31	1.8

4.   INTERNATIONAL

Operational cash generation from international operations is defined as the dividends paid to the Group.  In March 2011, Legal & General America (LGA) paid a dividend of $55m (£34m).  We are confident that the dividend flow from the international business is sustainable and we expect dividends to grow going forward.

Reconciliation of cash generation to IFRS operating profit

Net cash generation is defined as operational cash generation less new business strain for the UK non profit Risk and Savings businesses.   Operational cash generation is defined as the expected release from in-force business for the UK non profit Risk and Savings businesses, the shareholders' share of bonuses on with-profits business, the post-tax IFRS operating profit on other UK businesses, including the group capital and financing segment, and dividends remitted from our international businesses from sustainable cash generation.

IFRS profit in the year also includes non-recurring experience variances and changes to valuation assumptions which are expected to be neutral to positive over the medium term.

Reconciliation of operational cash generation to operating profit after tax £m	H1 2011	H1 2010
Operational cash generation	498	417
New business strain	(71)	(44)
Net cash generation	427	373
International profit (less dividends paid)	9	7
Experience variances, assumptions changes and other variances	(28)	22
Investment projects	(18)	(10)
Operating profit (net of tax)	390	392
Investment variance	(27)	10
Impact of change in UK tax rates	(4)	-
Property losses attributable to non-controlling interests	(1)	(1)
Profit after tax	358	401

New Business IRR and Payback Periods

 

The IRR on protection business improved to 16% (H1 2010: 15%) and the payback period reduced to 4 years.  Pricing in the annuities market, whilst not as favourable as in 2010, still remains strong and annuities were written at positive new business strain in H1 2011.

In Savings, unit linked bonds and non profit pensions benefited from cost efficiencies and lower commissions.  In unit linked bonds the IRR increased to 13% (H1 2010: 9%) and the payback reduced to 6 years from 8 years in H1 2010.  In pensions, cost efficiencies and strong growth in new business resulted in lower unit costs and an increase in IRR from 7% in H1 2010 to 8% in H1 2011 and a decrease in the payback period to 12 years (H1 2010: 13 years). 

New business IRR and payback periods	H1 2011 PVNBP £m	H1 2011 Internal Rate of Return1 %	H1 2011 Undiscounted payback period (years)	H1 2010 PVNBP £m	H1 2010 Internal Rate of Return1 %	H1 2010 Undiscounted payback period (years)
Protection	466	16	4	417	15	5
Annuities	756	>30	<0	1,058	>30	<0
Unit linked bonds	600	13	6	273	9	8
Pensions	1,277	8	12	1,115	7	13

1. Internal Rate of Return on new business.

 

Business review - Balance sheet

 

Capital resources - IGD¹ surplus increased to £4.0bn

The end H1 2011 Insurance Groups Directive (IGD) surplus of £4.0bn increased from £3.7bn at the end of 2010 due to retained profits in the Group.  The reconciliation from FY 2010 to HY 2011 is shown below.

IGD Surplus £m	H1 2011	FY 2010
At start of period	3,745	3,148
Operational cash generation	498	840
New business strain	(71)	(80)
Dividends	(97)	(279)
Experience variances, assumption changes and other variances	27	138
Investment variance	(27)	46
Decrease /(increase) in operational regulatory capital requirement	(8)	(155)
Release of capital from US capital management programme	-	132
Other	(32)	(45)
At end of period	4,035	3,745

As at 30 June 2011 the IGD capital resources of £6.9bn covered the capital resources requirement of £2.9bn by 2.38 times, giving rise to an estimated surplus of £4.0bn.

Capital £bn	30/06/11	31/12/10
Group capital resources	6.9	6.7
Group capital resources requirement	2.9	3.0
IGD surplus	4.0	3.7
Coverage ratio %	238	226

The increase in the Group capital resources to £6.9bn (31/12/2010: £6.7bn) is primarily due to retained profits from first half trading operations less the cost of the proposed interim dividend.  Group capital resources requirement decreased from £3.0bn to £2.9bn due to the changes in solvency capital outlined below.

1. All IGD amounts are estimated, unaudited and after accrual of the interim dividend of £97m (H1 2010: £78m, FY 10: £279m).

Movements in UK solvency capital

Solvency capital is analysed into two components:

1.   Changes to operational capital requirements.  This is the result of increases to required capital from new business written in the period less decreases in required capital from in-force business running off.

2.   Changes to technical capital requirements.  This is the result of the mechanical calculation of the capital required in the with-profits fund on the regulatory (Peak 1) and realistic (Peak 2) bases.  The interaction between the two bases will give rise, under certain market conditions, to a technical capital requirement called the With-profits insurance capital component (WPICC).

Pillar 1 capital requirement £bn	H1 2011	FY 2010
Risk	1.6	1.5
Savings	0.1	0.1
With-profits - operational	0.6	0.7
Other subsidiaries	0.4	0.4
Operational group capital resources requirement	2.7	2.7
With-profits insurance capital component (WPICC)	0.2	0.3
Group capital resources requirement	2.9	3.0

 

Liquidity

Limited appetite for liquidity risk.		Legal & General has a limited appetite for liquidity risk and seeks to maintain 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 and taking into account the provision of facilities to operational businesses to accommodate their liquidity requirements in extreme stressed scenarios e.g. pandemic and adverse weather events.  The liquidity position across our operational business units is very strong.  On average during the first half of 2011 daily overnight cash deposits of circa £500m were maintained as well as carrying significant holdings of liquid assets.
Access to liquid funds…. ….with no bonds maturing before 2015.		In addition the Group has had in place for over 20 years a Commercial Paper programme providing the Group with access to short term funds as and when required.  As at 30 June 2011 the Group had in place undrawn committed syndicated and bilateral facilities in excess of £1bn provided by a number of the Group's key relationship banks, maturing in December 2012.  The Group has no outstanding bonds with maturity or call dates before 2015.  There are no restrictive covenants and no credit rating or share price triggers in respect of group debt or liquidity positions.

European embedded value disclosure

Analysis of EEV results - covered business £m		PVNBP		Margin %		Contribution
		H1 2011	H1 2010	H1 2011	H1 2010	H1 2011	H1 2010
Risk		1,222	1,475	7.6	9.4	93	139
Savings		2,032	1,869	0.8	0.6	16	11
International		645	536	4.3	1.9	28	10
Total		3,899	3,880	3.5	4.1
Contribution from new business						137	160
Expected return from in-force business						244	260
	Persistency					7	(2)
	Mortality / morbidity					(48)	14
	Expenses					36	(13)
	Modelling changes and other					117	44
Experience variances and assumption changes						112	43
Development costs						(7)	(8)
Contribution from shareholder net worth						118	83
Operating profit on covered business						604	538
Business reported on an IFRS basis						58	51
Operating profit						662	589

Analysis of EEV results - worldwide business £m	H1 2011	H1 2010
Risk	344	367
Savings	94	61
Investment management	104	81
International	87	61
Group capital and financing	58	33
Investment Projects	(25)	(14)
Operating profit	662	589
Variation from longer term investment return	(59)	(184)
Effect of economic assumption changes	(13)	179
Property losses attributable to non-controlling interests	(1)	(1)
Profit from ordinary activities before tax	589	583
Tax and other	(139)	(161)
Effect of tax rate change	156	-
Profit for the period	606	422
Earnings per share (p)	10.42	7.26
Shareholders' equity	8,147	6,958
Number of shares (m)	5,871	5,866
Shareholders' equity per share (p)	138.8	118.6

operating profit

EEV operating profit increased by 12% to £662m (H1 2010: £589m).  The contributing factors to this increase are discussed below.

New business contribution

Contribution from worldwide new business was £137m (H1 2010: £160m). The margin on this business reduced to 3.5% (H1 2010: 4.1%) reflecting reduced margins in the annuity business as a result of competitive pressure and business mix changes in H1 2011.

Risk

New business margin %	H1 2011	H1 2010
Protection	6.4	6.0
Annuities	8.4	10.8
Risk	7.6	9.4

The impact of the intense competitive environment in the protection market in 2011 was partially offset by improved business mix, initial and renewal expenses.  This led to an increase in the new business margin to 6.4% (H1 2010: 6.0%). The IRR on protection new business was 16% (H1 2010: 15%) with a reduced payback period of 4 years (H1 2010: 5 years).

The annuities margin decreased to 8.4% (H1 2010: 10.8%) reflecting lower annuity margins, a change in business mix and more competition in the individual annuity market.

Savings

New business margin %	H1 2011	H1 2010
Unit linked bonds	1.6	0.7
Non profit pensions	0.2	(0.1)
With-profits	1.8	2.1
Savings	0.8	0.6

In unit linked bonds, the new business margin was 1.6% (H1 2010: 0.7%).  This translates into an IRR of 13% (H1 2010: 9%) and a payback period of 6 years (H1 2010: 8 years).

In non profit pensions, the increase in new business volumes particularly in the fee-based workplace pensions market, has lowered unit costs and increased the margin to 0.2% in H1 2011 (H1 2010: negative 0.1%).  This equates to an IRR and payback period of 8% and 12 years respectively (H1 2010: IRR 7%, payback period 13 years).

The with-profits margin has reduced slightly from 2.1% in H1 2010 to 1.8% in H1 2011.

International

New business margin %	H1 2011	H1 2010
USA	9.8	1.4
Netherlands	-	1.2
France	0.8	2.3
International	4.3	1.9

The consolidated International new business margin increased to 4.3% in H1 2011 (H1 2010: 1.9%).  This was driven by an increase in the USA to 9.8% (H1 2010: 1.4%) as a result of new business volume improvements and their impact on expense recovery and increasing reinvestment yields.

In-force contribution

The expected return from in-force business decreased to £244m (H1 2010: £260m) due to the unwind of a lower opening discount rate (7.3% vs 8.0%) and a lower tax gross up rate (23% vs 28%).

Positive experience variances and assumption changes of £112m (H1 2010: positive £43m) included:

Persistency: £7m (H1 2010: negative £2m).  This includes an improvement in persistency in the US business.

Mortality/morbidity/longevity: negative £48m (H1 2010: positive £14m).  This reflects adverse mortality experience in the Group Protection business.

Expenses: £36m (H1 2010: negative £13m), primarily reflecting lower unit costs in individual protection.

Other: £117m (H1 2010: £44m). This includes a reassessment of future BPA reserve release as data is loaded onto the BPA system (£19m), the unwind of the cost of capital in the UK (£27m) and one-off modelling improvements (£50m).

Investment management

The Investment management business is reported on an IFRS basis; operating profit of £104m (H1 2010: £81m) excludes £13m (H1 2010: £17m) 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.  The capitalised value of these internal profits is £0.2bn (3p per share) and is included in the current definition of Group embedded value.

Group Capital and financing

The profit from group capital and financing increased to £58m in H1 2011 (H1 2010: £33m) as a result of higher average invested assets throughout H1 2011.

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 £589m (H1 2010: £583m).

The variation from longer term investment return was negative £59m in H1 2011 (H1 2010: negative £184m).  This was primarily due to underperformance of Society assets against assumptions, reflecting weaker investment markets and mark to market movement in debt related swaps.

The effect of economic assumption changes amounted to negative £13m (H1 2010: positive £179m).

principal risks and uncertainties

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

Regulatory and legislation

Changes in regulation or legislation may  have a detrimental effect on our strategy or profitability Legislation and government fiscal policy can influence our product design, the retention of existing business and our required reserves for future liabilities. Regulation defines the overall framework for the design, marketing and distribution of our products; and the prudential capital that we hold. The nature of long term business can result in certain regulatory changes having a retrospective effect.

We base our business strategy upon prevailing regulation and legislation, and known or anticipated change. To mitigate the risk that changes in legislation or regulation have adverse or unintended impacts, we seek to engage with regulatory and legislative authorities to assist in the evaluation of change and develop outcomes that meet the needs of all stakeholders. Current areas of uncertainty include the regulatory implementation of Solvency II; the timetable and form of changes arising from International Financial Reporting Standards (IFRS) 4 Phase 2; and FSA consultation on the operation of With Profits Funds. We also continue to work with our business partners in their transition to the Retail Distribution Review regime, which comes into operation in 2012.

 

financial market and economic conditions

Investment market performance or conditions in the broader economy may adversely impact our earnings and profitability The performance and liquidity of investment markets, interest rate movements and inflation can impact the value of investment assets we hold to meet the obligations arising from insurance business as well as the value of the obligations themselves, resulting in mismatches in the profile of cash flows of our assets and liabilities. Significant falls in investment values can also impact the fee income of our investment management business. Broader economic conditions can impact the timing of the purchase and retention of retail financial services products.

2011 is seeing further recovery of major investment markets. However, the outlook for the broader economy remains uncertain with potential for a rise in inflation and increases in interest rates. Recent events in the Middle East and North Africa as well as Sovereign debt issues within the Euro zone add to uncertainty. A prolonged period of economic uncertainty or a return to recession may result in increased levels of consumer saving benefiting our retail savings business. However, other product segments such as protection may experience reduced demand, impacting our new business volumes and our earnings. As part of our medium term plan we have sought to ensure focus upon those market segments that will be resilient in projected conditions. The ongoing potential for a euro-zone based sovereign debt crisis presents the risk of falls in investment asset values and significant disruption and illiquidity in global financial markets. Disruption from a major Sovereign debt event may impact our ability to execute hedging strategies that ensure the profile of cash flows of our assets and liabilities are appropriately matched. Falls in investment values may impact the value of and income from our Shareholder cash flows.

 

industry change

The Group may not maximise opportunities from structural and other changes within the financial services sector The financial services sector continues to go through a period of change. This presents a range of challenges as well as opportunities to providers of sufficient scale such as Legal & General.

Significant changes in the markets in which we operate may require the review and realignment of elements of our business strategy. A failure to be sufficiently responsive to potential change and understand the implication to our businesses, or the incorrect execution of change may impact the achievement of our strategic objectives. We seek to ensure we have market leading expertise in the core fields in which we operate, and actively focus on retaining the best personnel with the knowledge to design and support our products, and manage their evolution as market and consumer requirements change.

 

Counterparty and third party risks

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 match long term assets and liabilities, exposures arise to the issuers of corporate debt and other financial instruments. We also have exposures to banking, money market and reinsurance counterparties, and the providers of settlement, custody and IT services.

Market reaction to a significant default event could result in the short term diminution in the market value of corporate bond assets held in respect of our annuities business and in extreme circumstances may require an increase in default provisions for potential or actual defaults. A failure by a key service provider may result in short term operational disruption of our business processes. We continue to actively manage our exposure to default risk, setting robust counterparty selection criteria and exposure limits.

 

UK Financial Services Sector Contagion Risks

As a UK based Group, our earnings are influenced by the perception of the UK financial services sector as a whole. Investment market performance, actions by regulators against organisations operating in the financial services sector and shock events can impact the confidence of retail investors in the sector as a whole. Such events may also result in changes to the regulatory and legislative environment in which we operate.

We manage our brand and reputation and seek to differentiate our business model from that of our competitors, focusing on our customers' needs through a diversified portfolio of risk, savings and investment management businesses. In addition, we continue to focus on developing our international businesses. Where events lead to proposals to change the environments in which we operate, we seek to engage with regulators and legislators at a UK and European level to assist in the evaluation of change and influence the development of outcomes that meet the needs of all stakeholders.

 

Mortality, Catastrophe and other assumption uncertainties

Reserves for long term business may require revision as a result of changes in experience, regulation or legislation The writing of long term insurance business necessarily requires the setting of assumptions for long term trends in factors such as mortality, persistency, valuation interest rates, expenses and credit defaults. Extreme events may require recalibration of these assumptions. Forced changes in reserves can also be required as a result of changes in regulation or legislation.

Our product pricing assumptions for annuities, protection and other insurance business reflect the risks we assess as being exposed to. We undertake significant analysis of longevity and mortality risks to ensure an appropriate premium is charged for the risks we take on and that our reserves remain appropriate. We are focused on developing a comprehensive understanding of annuitant mortality, including the development of 'cause of death' models using UK population data and engaging directly with the medical profession and scientific community. For our protection and general insurance businesses we continue to evolve and develop our underwriting capabilities. We are closely monitoring the implementation in the UK of the ECJ Gender Equality ruling, its impact for our customers and the required changes to our business.

 

Enquiries

Investors:
Matt Hotson	Director, Investor Relations & Strategy	020 3124 2150 / 07711 956 077
Ching-Yee Chan	Investor Relations Executive	020 3124 2345
Media:
John Godfrey	Group Communications Director	020 3124 2090
Richard King	Head of Media Relations	020 3124 2095
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 video of Tim Breedon, Group Chief Executive discussing these results is also available.

A presentation will take place at 09.30 BST 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].  There is no passcode.

Technical queries on the results should be e-mailed to [e-mail] or to one of our team using the convention [e-mail]. Answers to technical queries will be posted to our shareholder website on 4 August 2011.

FINANCIAL CALENDAR 2011	DATE
Ex dividend date	7 September 2011
Record date	9 September 2011
Payment date of 2011 interim dividend	3 October 2011
Q3 Interim Management Statement 2011	9 November 2011
Preliminary Results 2011	8 March 2012

 

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.

 

going concern statement

The group's business activities, together with the factors likely to affect its future development, performance and position in the current economic climate are set out in this Interim Management Report.  The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Group Results. Principal risks are detailed on page 24.  In addition, the financial statements include, amongst other things, notes on the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.

The 2011 economic climate remains uncertain. However, based on the available information on the future, the directors consider that the Group has the plans and resources to manage its business risks successfully as it has a diverse range of businesses and remains financially strong.

After making enquiries, the directors have a reasonable expectation that the company and the group have adequate resources to continue their operations for the foreseeable future. For that reason, they continue to adopt the going concern basis in preparing the accounts.

 

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;

I.          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;

II.          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;

III.         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

IV.        The directors of Legal & General Group Plc are listed in the Legal & General Group Plc Annual Report for 31 December 2010, except James Strachan and Sir David Walker who resigned as non-executive directors of the company on 25 May 2011 and Mike Fairey and Stuart Popham who were appointed to the Board on 1 May 2011 and 1 July 2011 respectively. A list of current directors is maintained on the Legal & General Group Plc website: legalandgeneralgroup.com.

By order of the Board

T. J. Breedon Group Chief Executive 2 August 2011

N. D. Wilson Group Chief Financial Officer 2 August 2011

 

END

 

 

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