L&G Half-year Results Part 1
LEGAL & GENERAL GROUP PLC HALF-YEAR RESULTS
Stock Exchange Release
05 August 2008
Page 1
Growth in sales, operating profit and dividend
Strength drives growth despite weaker investment markets
Financial
Worldwide new business APE(1) up 8% year on year to £806m APE (H107: £749m)
Growth in pension buyouts continues, sales treble to £1.4bn (single premium)
Total protection volumes stable despite difficult housing market
Strong growth of 22% in non profit pensions, SIPP(2) sales almost double
Institutional fund management new business continues to excel with £17.6bn in new funds
UK new business contribution up 8%
Operating profit up
EEV(3) operating profit up 6% to £626m (H107: £589m)
EEV operating profit EPS up 11% to 7.33p
IFRS(4) operating profit up 1% to £391m (H107: £386m)
IFRS operating profit EPS up 17% to 4.61p
Strong balance sheet
Society's(5) financial strength AA+
£1bn share buyback programme continues, £764m repurchased as at 29 July 2008
Half-year dividend up 7.5% to 2.01p (H107: 1.87p)
Investment markets reduce profit after tax
EEV profit after tax from ordinary activities £56m (H107: £672m)
IFRS (loss)/profit after tax from ordinary activities £(27)m (H107: £329m)
Business performance
Risk
Record H1 for our annuities business as APE doubles
Group protection APE up 28%
Individual protection APE down only 11%, despite weak mortgage market
Savings
Positive net flows into all product groups (core retail investments, pensions and bonds)
Suffolk Life contributes to stronger pension sales and margin
Core retail investment sales up 34%, benefiting from broader distribution and product range
Investment management
Largest pension fund manager in UK - £286bn AUM(6)
Structured solutions funds up 25% since start of year to £15bn
International development
Continued expansion in international footprint
Joint venture in Gulf States signed with Ahli United Bank
Joint venture with Bank of Baroda and Andhra Bank in India progressing to plan
(1) Annual Premium Equivalent = regular premium + 10% of single premium
(2) Self Invested Personal Pension
(3) European Embedded Value
(4) International Financial Reporting Standards
(5) Legal & General Assurance Society Limited
(6) Assets under Management (at 30 June 2008)
Page 2
Group Chief Executive, Tim Breedon, said:
'Legal & General has delivered a strong set of results in market and economic conditions that have, as we expected, been challenging. We have continued to focus on exploiting the resilience of our business model to grow profitably. These results reflect the success of this approach and demonstrate our continued strengths: strong finances, multi-channel distribution, a diverse product range across complementary businesses, a strong brand and operational flexibility.
'The risk business has delivered a record six months of new business. We have diversified our individual protection sales away from the housing market in recent years, which has limited the impact of the difficult mortgage conditions. Annuities are continuing to see a surge in new business which began in the last quarter of 2007 with the demand for pension buyouts remaining high.
'The savings business has had a tougher six months against a background of investment market volatility, adverse tax changes and a rising cost of living. Despite this, we have continued to attract savings funds and have seen net inflows across all our product groups (core retail investments, pensions and bonds). Our acquisition of Suffolk Life in May has already started to contribute positively to sales and margins in our non profit pension business, which had a strong six months.
'The investment management business continues to thrive. Strong sales and higher profits again this year reinforce our position as the number one UK pension fund manager(7) - more than twice the size of our nearest competitor at the end of last year.
'Weaker equity markets inevitably create adverse investment variances which affect our reported after tax profits: these impacts can be expected to smooth out over time. As always, our operating profits, cash flows and balance sheet provide the barometer of our performance and financial strength. We are confident of our ability to continue growing profitably.'
Business Commentary
Legal & General has three main businesses: Risk, Savings and Investment management
Risk businesses
Protection
Protection sales were broadly in line with last year's levels in H1 at £110m APE (H107: £111m), but achieved in very different economic conditions. Group protection sales were up 28% to £37m APE (H107: £29m) driven by product innovation, our strong reputation and high service standards. Individual protection sales were down just 11% in H1 to £73m APE (H107: £82m) despite Bank of England data showing mortgage approvals down 28%(8). The business has been diversifying its range of products and distribution away from mortgage transactions.
Annuities
The annuity business had a record H1 with sales up 100% to £178m APE (H107: £89m). This was driven by pension buyout business where we have written nearly 140 policies worth £1.4bn (H107: £0.4bn). As expected, sales were again dominated by shorter duration, large pension in payment contracts. Individual annuity sales were lower in H1 at £40m APE (H107: £51m) due to selectivity in pricing and increased competition in Q2.
(7) Hymans Robertson Market Briefing Survey 2008
(8) Bank of England mortgage/remortgage approvals (Year to June 2008)
Page 3
Savings businesses
Non profit pensions
Sales were up 22% in H1 to £162m APE (H107: £133m). SIPP sales increased by 96% in H1 to £49m APE (H107: £25m) driven by new product launches and Suffolk Life sales being included in our figures for the first time since its acquisition in May. Corporate pensions also had a strong H1, with sales up 47%, with our innovative Group SIPP product continuing to attract new customers.
Unit linked bonds
Sales of unit linked bonds were down in H1 to £75m APE (H107: £136m). The step change in sales started when the Government proposed its capital gains tax reforms last Autumn. Investment market volatility has also been a factor. Bond sales appear to be stabilising (Q1 £40m/Q2 £35m APE) and we are building momentum in offshore and high net worth markets.
With-profits savings
Sales were up on the previous quarter with Q2 £61m APE (Q1 £43m), but overall sales in the first half were lower at £104m (H107: £129m). Within this total, with-profits bonds sales were up 120% year on year following a new product launch.
Retail investments
Sales of UK core retail investments were strong, up 34% with £115m APE (H107: £86m) and higher Q2 on Q1. Sales growth has been driven in challenging economic conditions by continued expansion in our product offering and distribution - sales through Nationwide Building Society began in February. We have also launched a range of fund of funds products following the transfer of £0.4bn of Bradford & Bingley Group client assets.
Investment management
The institutional investment management business has continued to attract new funds with gross inflows of £17.6bn in H1 (H107: £17.0bn). Our structured solutions business has grown funds under management to £15bn, up from £12bn at the start of the year. Total UK funds under management for the investment management business were £286bn at 30 June 2008.
Outlook
Our business model gives us the confidence in our ability to continue to exploit opportunities throughout the current economic cycle and build a strengthened market position and platform for profitable growth. Strong finances, diversified product range and distribution have enabled us to deliver increased new business, operating profits and dividend.
Corporate markets have seen strong progress this year. Employers are continuing to support employee benefits such as pensions and group protection where we expect growth to continue. The conditions stimulating the pension buyout market remain. The quotation pipeline for pension buyouts is strong. We envisage our investment management business continuing to benefit from institutional flows and diversification into non index products.
We are confident in the resilience of our individual protection business and the ongoing action we are taking to diversify sales away from the mortgage event. We do however expect to see volumes remain at current lower levels throughout the rest of 2008.
Equity market volatility has impacted confidence in savings markets. We have seen some changes in savings habits, notably the increased popularity of low risk products. Our pensions business has continued to grow scale and margin - a trend we anticipate continuing into the second half. We expect to see the unit linked bond market settle at current reduced levels. We remain confident in our ability to grow assets under administration due to broad distribution and product range.
Page 4
Balance sheet and dividend
Legal & General's balance sheet remains strong, underpinned by a high quality investment portfolio. As at the end of June,
IGD(9) surplus stood at £3.4bn, Society surplus at £3.9bn, and Society's AA+ financial strength rating remained in place.
The Board undertakes a comprehensive balance sheet scenario and stress testing exercise each year and a balanced scorecard assessment is presented to the market. This ensures ongoing discipline in the efficient management of the capital base of the Group. Last year, this exercise identified a £1bn excess of capital over the business' requirements, and we commenced a share buyback programme in July 2007. Share repurchases under this programme continue, with £764m completed by the 29 July. The Board has concluded that it is appropriate to continue and complete this share buyback programme which is expected to conclude by the end of 2008. Legal & General remains committed to efficient balance sheet management, and the return of excess capital to shareholders.
The Board has proposed an interim dividend of 2.01p per share, an increase of 7.5%. The Company's dividend is based on a thorough review of the Group's financial strength, future capital requirements and current and future investment market conditions, and a continued commitment to a strong balance sheet and profitable growth.
(9) Insurance Groups Directive
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
Anthony Carlisle Citigate Dewe Rogerson 07973 611888
Page 5
Notes
Issued share capital at 30 June 2008 was 5,979,009,914 shares of 2.5p.
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 London time 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 and overseas investors should dial +44 (0)1452 568 060. The conference ID number is 54355101.
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 as adopted by the European Union. 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 4 August 2008 and constitute non statutory accounts within the meaning of Section 240 of the Companies Act 1985. The Group's financial statements for 2007 include the auditors' unqualified report and do not contain a statement under either Sections 237(2) or 237(3) of the Companies Act 1985.
Financial calendar 2008:
|
Event |
Date |
|
Ex-dividend date for 2008 interim dividend |
3 September 2008 |
|
Payment date for 2008 interim dividend (to members registered on 5 September 2008) |
1 October 2008 |
|
Q3 2008 New Business |
16 October 2008 |
|
Q4 2009 New Business |
29 January 2009 |
|
2008 Preliminary Results |
25 March 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 plans and its 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 Plc'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 authorities, the impact of competition and the policies and actions of governmental and regulatory authorities and the timing impact and other uncertainties of future acquisition or combinations within relevant industries. As a result, Legal & General Group Plc's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in Legal & General Group Plc's forward-looking statements. 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.
Page 6
Business review
|
Financial highlights |
H1 2008 |
H1 2007 (restated4) |
|
EEV(1) basis: |
|
|
|
Worldwide life and pensions new business (PVNBP(2)) |
£5,301m |
£4,979m |
|
Worldwide contribution from new life and pensions business |
£194m |
£178m |
|
Worldwide life and pensions operating profit |
£564m |
£551m |
|
Worldwide operating profit |
£626m |
£589m |
|
Profit from ordinary activities after tax |
£56m |
£672m |
|
Shareholders' equity |
£7,781m |
£8,365m |
|
Shareholders' equity per share |
130p |
128p |
|
Diluted earnings per share based on operating profit after tax |
7.30p |
6.59p |
|
IFRS(3) basis: |
|
|
|
Worldwide operating profit |
£391m |
£386m |
|
(Loss)/profit from ordinary activities after tax |
£(27)m |
£329m |
|
Shareholders' equity |
£4,675m |
£5,515m |
|
Shareholders' equity per share |
78p |
84p |
|
Diluted earnings per share based on operating profit after tax |
4.59p |
3.91p |
|
Interim dividend per share |
2.01p |
1.87p |
Notes:
1. European Embedded Value
2. Present Value of New Business Premiums
3. International Financial Reporting Standards
4. Restated for revised IFRS operating profit definition
RESULTS OVERVIEW
The present value of new worldwide life and pensions premiums increased by 6% in the first half of 2008 to £5,301m (H1 07: £4,979m) driven by continued success in the pension buyout market and strong growth in both group protection and non profit pensions. These positive developments more than offset lower sales in individual protection and significantly lower unit linked bond sales.
The contribution from new life and pensions business grew by 9% to £194m (H1 07: £178m), resulting from increased sales of higher margin risk products and an improvement in pension margins. These effects more than offset lower unit linked bond margins. EEV operating profit was up 6% to £626m, reflecting the higher new business profits, a solid in-force result, higher profits in our investment management business and lower flood costs in general insurance.
IFRS operating profit was higher in the first half of 2008 at £391m (H1 07: £386m). Higher profit in our investment management business underpinned this improvement along with a 20% increase in the transfer from the with-profits business. Our non profit life and pension businesses continued to be self financing, with the expected release from our in-force portfolio exceeding the cost of new business investment.
Lower investment markets have led to a negative variation from longer term investment return of £538m on an EEV basis (H1 07: positive £197m), reducing profit from ordinary activities after tax to £56m in H1 08 (H1 07: £672m).
Shareholders' equity on the EEV basis stood at £7.8bn at 30 June 2008 (FY 07: £8.5bn). Before allowing for the cost of the 2007 final dividend and repurchase of shares under our buyback programme, shareholders' equity on the EEV basis was up 1% compared to the year end 2007 position. We have continued to increase the efficiency of the balance sheet by buying back £0.4bn of shares under our buyback programme. These were repurchased throughout the period at a price below EEV per share, which was 130p at 30 June 2008 (FY 07: 134p).
The balance sheet position, as summarised in our capital balanced scorecard remains strong despite weaker investment markets. The AA+ financial strength rating for Legal & General Assurance Society Limited remains unchanged. Our buyback programme initiated 12 months ago continues, and is expected to complete later this year. The current and projected cash profile of the group remains strong and underpins the Board's confidence in proposing a dividend of 2.01p per share, an increase of 7.5%.
Page 7
NEW BUSINESS AND EEV MARGINS
|
|
H1 2008 |
H1 2007 Restated(1) |
||||||
|
£m |
APE |
PVNBP |
CNB(2) |
PVNBP Margin (%) |
APE |
PVNBP |
CNB(2) |
PVNBP Margin (%) |
|
UK life and pensions: |
|
|
|
|
|
|
|
|
|
Protection |
110 |
553 |
38 |
6.9 |
111 |
563 |
51 |
9.1 |
|
Annuities(3) |
178 |
1,776 |
135 |
7.6 |
89 |
895 |
88 |
9.8 |
|
Total risk |
288 |
2,329 |
173 |
7.4 |
200 |
1,458 |
139 |
9.5 |
|
Unit linked bonds |
75 |
749 |
(4) |
(0.5) |
136 |
1,355 |
21 |
1.5 |
|
Pensions, stakeholder and other non profit |
162 |
1,047 |
(2) |
(0.2) |
133 |
920 |
(5) |
(0.5) |
|
With-profits savings |
104 |
711 |
11 |
1.5 |
129 |
739 |
10 |
1.4 |
|
Total savings |
341 |
2,507 |
5 |
0.2 |
398 |
3,014 |
26 |
0.9 |
|
Total UK life and pensions new business |
629 |
4,836 |
178 |
3.7 |
598 |
4,472 |
165 |
3.7 |
|
|
|
|
|
|
|
|
|
|
|
International life and pensions |
59 |
465 |
16 |
3.5 |
63 |
507 |
13 |
2.6 |
|
Total life and pensions new business |
688 |
5,301 |
194 |
3.7 |
661 |
4,979 |
178 |
3.6 |
|
|
|
|
|
|
|
|
|
|
|
UK core retail investments |
115 |
N/A |
N/A |
N/A |
86 |
N/A |
N/A |
N/A |
|
International retail investments |
3 |
N/A |
N/A |
N/A |
2 |
N/A |
N/A |
N/A |
|
|
|
|
|
|
|
|
|
|
|
Total new business |
806 |
|
|
|
749 |
|
|
|
|
|
New business |
|
New business(1) |
|||||
|
Institutional investment management |
|
17,645 |
|
|
|
17,021 |
|
|
(1) UK core retail investments excludes institutional investments in unit trust funds which are disclosed as part of institutional fund management new business. H1 07 has been restated to reflect this change.
(2) Contribution from new business
(3) Annuities written in the with-profits part of the fund have been recategorised from 'with-profits' to 'annuities' and H1 07 comparatives restated. This business amounted to £15m of PVNBP (H1 07: £33m; FY 07: £47m) and £1m of new business contribution (H1 07: £1m; FY 07: £2m)
Worldwide new business APE was up 8% to £806m (H1 07: £749m), primarily as a result of growth in our Risk business. Life and pensions new business margin was 3.7% (H1 07: 3.6%) of PVNBP, the increase reflecting stable margins in the UK and higher margin in our overseas businesses.
UK Risk new business
Total APE sales increased 44% to £288m, driven by a continued surge in pension buyout business and strong growth in group protection.
Protection new business APE was 1% lower than in the first half of 2007, a resilient result reflecting the strength of our diversification of product and distribution. Within this result group protection sales grew 28% - benefiting from our strong reputation and high service standards. We have continued to develop our administrative and underwriting capabilities in the first half and recently launched an innovative underwriting approach which has been received well by intermediaries.
Individual protection APE was down 11% - a good result against the backdrop of a weakening housing market which has seen 28% reduction in mortgage approvals. We have, in the first half, focused increasingly on product sales not related to the mortgage event. Our distribution relationship with Nationwide Building Society went live in February and is already making a good contribution to sales.
The protection margin was 6.9% in H1 08 (FY 07: 9.3%; H1 07: 9.1%). There was a benefit to margins of lower in-force expenses, offset by more competitive pricing conditions in the first half.
Page 8
Annuity sales continued, in line with our earlier indication, at a high level in the second quarter, to give £178m (H1 07: £89m) of APE in the first half. Individual annuity sales were lower by 22% reflecting increased selectivity in our pricing and increased competition in Q2.
This was more than offset by the surge in pension buyout business in the first half. Companies continue to demand products which help to protect their balance sheet from pension scheme volatility - and quotation activity remains high. New business is now dominated by larger pension in payment contracts, but it is testament to our operational model that we still wrote nearly 140 policies in the first half of the year.
The annuity business margin was 7.6% (FY 07: 9.1%; H1 07: 9.8%). As reported in our preliminary results, the vast majority of new buyout business is being written for pension in payment and less for deferred business, shortening the average duration of new business by approximately 3 years. Under the EEV methodology, this mechanically reduces the reported new business margin.
UK Savings new business
APE sales in our savings business (including UK core retail investments) were 6% lower in the period at £456m - a robust performance in a very challenging market place. Within this there was a shift in the mix of business, with strong growth in non profit pensions, with-profits bonds and core retail investments offsetting lower sales in unit linked bonds.
Unit linked bond sales were significantly lower, down 45% in the first half to £75m of APE, continuing the trend seen in Q1 2008. The step change in volumes this year reflected the impact of changes to Capital Gains Tax and some customer caution towards investment in a period of market volatility. We have continued to reposition our business to focus on those areas of the bond market which remain buoyant - including the high net worth and offshore bond markets.
As a result of the drop in sales, unit acquisition expenses have increased compared to year end 2007 levels. This has driven a reduction in margins to negative 0.5% (FY 07: positive 0.8%; H1 07: 1.5%).
Non profit pensions continued to grow, with new business APE up 22% in the first half of the year. We have seen progress in the underlying non profit pension business, supplemented by seven weeks of sales from Suffolk Life, a leading high net worth pension provider acquired in May. SIPP sales accounted for 50% of retail non profit pension sales in the first half, reflecting our ongoing strategic repositioning of the pension business.
Margins improved to negative 0.2% (FY 07: negative 0.8%; H1 07: negative 0.5%). We continue to invest in improvements in systems and administration to build sustainable value in the pensions business.
With-profits savings has seen a pickup in sales of with-profits bonds - up 120% to £11m of APE sales. Individual pensions written in the with-profits part of the fund were £85m APE (H1 07: £111m). These products reflect primarily older-style pension contracts and increments on existing schemes and have not seen the increase in demand reflected in our non profit pensions business.
With-profits savings margins were higher at 1.5% in the first half (FY 07: 1.3%; H1 07: 1.4%) reflecting favourable change in mix.
Core retail investments grew strongly against a backdrop of volatility in investment markets. The underlying business grew, reflecting continued focus on expanding our product, distribution and administrative infrastructure. With the addition of products distributed through Nationwide Building Society, APE new business grew by 34% year on year. We have been successful in expanding our sales through specialist IFAs, offsetting more challenging conditions in bank and direct distribution.
International new business
In the US, our high net worth term business continued to deliver growth, with regular premiums up 7% to $47m. A Triple X financing structure was agreed in the second half of 2007 to cover 2007 and 2008 new business. As a result, margins in our US business were higher at the FY 07 stage (7.3%) and in H1 08 (7.0%) than was seen in H1 07 (1.5%).
In the Netherlands, industry conditions remained challenging, but overall APE new business was stable at €21m. Although we have been successful in expanding market share in our selected product areas, price competition across the industry has contributed to reduced margins in the protection business, and reduced overall margins to 1.7% (FY 07: 2.5%; H1 07: 4.7%).
Page 9
In 2007, our French business benefited, along with the industry, from an exceptional volume of business stimulated by fiscal changes. As a result, we expected sales to return to more normal volumes in 2008, and overall APE new business was 36% lower at €25m. Underlying sales were below our expectations in volatile investment markets. As a result margins were lower at 1.5% (FY 07: 2.4%).
Institutional investment management new business
Institutional investment management sales (including unit trusts) were again strong at £17.6bn. Our core pension scheme fund management products continue to resonate with our customers and their advisers in volatile economic conditions. We have seen a higher proportion - 78% - of new managed pension fund business coming from existing clients this year - a trend which is likely to continue given our very large growth in funds over recent years. Combined with strong client retention, net sales supported UK total funds under management of £286bn, down just 4% from the year end position despite significant drops in global investment markets.
We have once again grown our structured solutions business - funds under management stood at £15bn at the end of the period, compared to £12bn at the start of the year. We continue to invest in our product and service infrastructure to ensure that our clients' needs are met.
EEV BASIS FINANCIAL RESULTS
UK life and pensions operating profit
|
£m |
H1 2008 |
H1 2007 |
|
Contribution from new business after cost of capital |
178 |
165 |
|
Contribution from in-force business |
171 |
191 |
|
Development costs |
(21) |
(10) |
|
Contribution from shareholder net worth |
178 |
151 |
|
UK life and pensions operating profit |
506 |
497 |
UK life and pensions - Contribution from in-force business
|
£m |
H1 2008 |
H1 2007 |
|
Expected return |
149 |
127 |
|
Experience variances and operating assumption changes(1) |
|
|
|
- Persistency |
(11) |
(3) |
|
- Mortality/morbidity |
10 |
5 |
|
- Expenses |
41 |
(15) |
|
- Other |
(18) |
77 |
|
Contribution from in-force business |
171 |
191 |
(1) Full experience investigations are not undertaken at the half-year. A conservative approach is taken when revisiting any future operating assumptions. A full review of assumptions is made with the preliminary results each year.
The expected return from the UK life and pensions business increased to £149m (H1 07: £127m) reflecting the unwind in the first six months of the opening discount rate of 7.5% on the opening adjusted in-force value of the UK life and pensions business. Details of the calculation can be found in Note 3.01 of the financial results.
Page 10
Experience variances and operating assumptions changes within the in-force UK life and pensions business totalled £22m, comprising:
-
Persistency: Experience variances and assumption changes totalling negative £11m related mostly to our unit linked bond business. We saw a small increase in lapse rates in the first half; this has been prudently taken to assumptions at a cost of £14m in the period. This was offset by a small improvement in experience on our with-profits savings business.
-
Mortality/morbidity: The overall positive impact of £10m related largely to improved experience in our group protection business. Other aspects of mortality and morbidity experience were in line with assumptions.
-
Expenses: In-force unit expenses within our individual protection business reduced as a result of continued focus on improving systems and processes within this market leading business. This led to a £49m positive assumption change at the end of the period. There were smaller positive contributions from non profit pensions, primarily offset by higher expenses relating to investment in operational capacity within our growing annuities business.
-
Other: Other experience variances and assumption changes amounted to negative £18m, being the sum of a number of small effects across our businesses. The £77m positive contribution reported in H1 07 included an £88m one-off impact of introducing market referenced fees for the management of internal assets.
UK life and pensions - Development costs
Development costs of £21m related to continued investment in strategic systems and development capability across our Risk and Savings businesses.
UK life and pensions - Contribution from shareholder net worth
The contribution from shareholder net worth increased to £178m (H1 07: £151m), reflecting in part a change in the definition of covered business between the two periods. The calculation of the contribution from shareholder net worth in the first half of 2008 is described in detail in Note 3.01 in the financial pages of this pack.
The value of Society shareholder capital invested assets and the embedded value of the contingent loan at the end of the period were £3.7bn and £766m respectively.
International life and pensions operating profit
|
£m |
H1 2008 |
H1 2007 |
|
Contribution from new business after cost of capital |
16 |
13 |
|
Contribution from in-force business |
|
|
|
- Expected return |
47 |
40 |
|
- Experience variances |
(13) |
(6) |
|
- Operating assumption changes |
- |
- |
|
Contribution from shareholder net worth |
8 |
7 |
|
Operating profit |
58 |
54 |
New business profits were higher in the period, reflecting the Triple X financing in the US which was secured in the second half of 2007.
Higher expected return and contribution from shareholder net worth reflect the unwinding of assumptions on higher opening balance sheet values.
Experience variances of negative £13m related primarily to the US business.
Page 11
Profit attributable to equity holders
|
£m |
H1 2008 |
H1 2007 |
|
Operating profit |
626 |
589 |
|
Variation from longer term investment return |
(538) |
197 |
|
Effect of economic assumption changes |
(10) |
(6) |
|
Property (expense)/income attributable to minority interests |
(13) |
17 |
|
Profit from continuing operations before tax attributable to equity holders |
65 |
797 |
|
Tax charge on profit from ordinary activities |
(9) |
(218) |
|
Effect of UK Budget tax changes |
- |
93 |
|
Profit from ordinary activities after tax |
56 |
672 |
|
Loss/(profit) attributable to minority interests |
13 |
(17) |
|
Profit attributable to equity holders |
69 |
655 |
There was a negative investment variance of £538m, largely as a result of lower equity and property values.
As we reported last year, the 2007 Budget gave rise to a one-off increase in embedded value of £93m, primarily from the reduction in the corporation tax rate to 28% from April 2008.
IFRS BASIS
UK life and pensions operating profit
|
£m |
H1 2008 |
H1 2007 Restated(1) |
|
Non profit business |
|
|
|
- Expected capital release |
241 |
211 |
|
- New business strain |
(237) |
(142) |
|
- Reserving changes and other adjustments |
64 |
38 |
|
Net capital released from non profit business (net of tax) |
68 |
107 |
|
Net capital released from non profit business (gross of tax) |
95 |
153 |
|
Investment return |
154 |
154 |
|
Other expenses |
(10) |
(15) |
|
Non profit business |
239 |
292 |
|
With-profits business |
60 |
50 |
|
UK life and pensions operating profit |
299 |
342 |
(1) Restated for revised IFRS operating profit definition.
The expected capital release from the in-force business was again higher than new business strain. The in-force release at £241m was 14% higher than in H1 07, reflecting growth in the business in 2007, and was boosted by a contribution from Nationwide Life. We expect the release of £406m reported for full year 2007 to be increased by around 10% in 2008.
New business strain increased to £237m (H1 07: £142m) in the first half of the year, reflecting the impact of significantly higher pension buyout volumes. Buyout business also attracted higher strain per pound of premium. This was partly offset by lower new business strain on unit linked bonds.
Reserving changes and other adjustments amounted to £64m (H1 07: £38m). This includes positive contributions from the release of provisions from our BPA data loading process, investment effects within our non profit business and positive movements in non-cash balances such as deferred tax.
Smoothed investment return remained stable at £154m. This reflected an average return of 3% on the average balance of invested assets held within Society shareholder capital during the first half of the year (including interest bearing intra-group balances), calculated on a quarterly basis. Invested assets (including interest bearing intra-group balances) held within the Society shareholder capital amounted to £4.5bn at 30 June 2008 (£4.7bn at 31 December 2007).
The with-profits transfer reflects one ninth of the cost of policyholder bonuses. The transfer, grossed up for shareholder tax, increased to £60m (H1 07: £50m) as a result of a higher level of product maturities.
Page 12
International life and pensions operating profit
|
£m |
H1 2008 |
H1 2007 |
|
USA |
30 |
32 |
|
Netherlands |
8 |
4 |
|
France |
10 |
5 |
|
International life and pensions operating profit |
48 |
41 |
US operating profit remained broadly stable at £30m (H1 07: £32m). Lower operating expenses and higher in-force profits on a growing book of business were offset by small adverse mortality experience.
The improvement in profits from our business in France to £10m (H1 07: £5m) reflected improved claims experience within our group risk business.
Investment management operating profit
|
£m |
H1 2008 |
H1 2007 |
|
Institutional investment management new business(1) |
17,645 |
17,021 |
|
Operating profit: |
|
|
|
- Managed pension funds |
63 |
51 |
|
- Property |
4 |
5 |
|
- Retail investments |
(1) |
6 |
|
- Other income |
27 |
11 |
|
Operating profit |
93 |
73 |
(1) Including £1,421m of institutional investments in unit trust funds (H1 07: £795m) previously reported within UK Savings
We believe that IFRS operating profit is more appropriate than EEV profit for considering the performance of our institutional investment management business. Profit of £93m was 27% higher than last year (H1 07: £73m), a proportion of which relates to a £15m increase in profit earned as a result of introducing market referenced fees for internal business. Excluding this, underlying profit was up 7% - a strong result in the context of investment markets.
General insurance operating profit
|
|
H1 2008 |
H1 2007 |
|||
|
£m |
Operating profit/(loss) |
Underwriting result |
Operating profit/(loss) |
Underwriting result |
|
|
Household |
(7) |
(14) |
(52) |
(59) |
|
|
Other |
3 |
3 |
14 |
11 |
|
|
|
(4) |
(11) |
(38) |
(48) |
|
In the first half of this year the general insurance business reported a loss of £4m (H1 07: loss of £38m). The result for H1 07 included £40m for the cost of exceptional weather events in the UK. We continue to build the household business across broker, mortgage related and direct channels, and have increased household gross written premium by 6% year on year while reducing expenses.
Page 13
Other operational income
|
£m |
H1 2008 |
H1 2007 Restated(1) |
|
Shareholders' other income: |
|
|
|
- Investment return on shareholders' equity |
29 |
27 |
|
- Interest expense |
(66) |
(55) |
|
|
(37) |
(28) |
|
Other operations |
(1) |
1 |
|
Unallocated corporate and development expenses |
(7) |
(5) |
|
Other operational income |
(45) |
(32) |
(1) Restated for revised IFRS operating profit definition.
Smoothed investment return on shareholders' equity was higher in the period. This includes investment return on the average balance of invested assets (including interest bearing intra-group balances) held centrally. As at 30 June 2008, these assets amounted to £0.8bn.
Interest expense increased primarily due to interest payments on the Innovative Tier 1 debt of £600m issued in May 2007.
Profit attributable to equity holders
|
£m |
H1 2008 |
H1 2007 Restated(1) |
|
Operating profit |
391 |
386 |
|
Variation from longer term investment return |
(422) |
96 |
|
Property (expense)/income attributable to minority interests |
(13) |
17 |
|
(Loss)/profit from continuing operations before tax attributable to equity holders |
(44) |
499 |
|
Tax attributable to equity holders |
17 |
(170) |
|
(Loss)/profit from ordinary activities after tax |
(27) |
329 |
|
Loss/(profit) attributable to minority interests |
13 |
(17) |
|
(Loss)/profit attributable to equity holders |
(14) |
312 |
(1) Restated for revised IFRS operating profit definition.
The variation from longer term investment returns contributed negative £422m in the period (H1 07: positive £96m). As described in the EEV financial results section above, the major contributor to this was lower investment markets in the period.
SHARE BUYBACK
In July 2007, Legal & General initiated a £1bn share buyback programme. By 29 July 2008, 609m shares had been repurchased at a cost of £764m (after costs).
Of this total, 330m shares were repurchased in the first half of 2008, at a cost of £408m (after costs), giving an average price per share of 123.6p (after costs). This compared with the volume weighted average price over that same period of 124.2p. All shares repurchased have been cancelled.
Page 14
INVESTMENT PORTFOLIO
Legal & General has no significant exposure to credit-impaired securities.
|
£bn |
30 June 2008 |
|
Worldwide funds under management |
304 |
|
Client and policyholder assets |
(259) |
|
With-profits fund assets |
(19) |
|
Assets to which shareholders are directly exposed |
26 |
|
|
|
|
Comprising: |
|
|
Assets held to back the UK non-linked non profit business |
18 |
|
Assets held to back other insurance businesses (including Triple-X reserves) |
2 |
|
Society shareholder capital assets |
4 |
|
Other Group shareholder assets |
2 |
|
|
26 |
|
|
|
|
Split by asset class: |
|
|
Equities |
2.5 |
|
Property |
0.3 |
|
Bonds (including cash equivalents) |
22.5 |
|
Derivative assets |
0.6 |
|
Cash |
0.5 |
|
|
26.4 |
|
|
|
|
Split of bonds by credit rating: |
|
|
AAA |
6.5 |
|
AA |
3.5 |
|
A |
8.1 |
|
BBB |
3.2 |
|
BB or below |
0.1 |
|
Not rated |
1.1 |
|
|
22.5 |
We manage £304bn of assets worldwide of which £259bn are managed for the exclusive benefit of clients and policyholders and for which shareholders bear no direct market risk.
£19bn of assets are held within the with-profits part of the fund in the UK. This fund is managed with the aim of being self-financing.
The shareholders' direct exposure to asset markets comprises:
-
Assets held to back Legal & General's UK non-linked non profit business of £18bn;
-
Assets held to back other insurance business of £2bn;
-
Society shareholder capital assets of £4bn, which are invested predominantly in equities (67% equities; 8% property; 25% bonds and cash); and
-
Other Group shareholder assets of £2bn, including shareholder assets managed centrally by the Treasury function and investments within general insurance, investment management and our international businesses.
In respect of the £22.5bn held in bonds to which shareholders are exposed, 95% is investment grade. At 30 June 2008, total asset-backed security (ABS) bond holdings within these portfolios amounted to £4.4bn with a AA average credit rating. Within this, we held:
-
Sub-prime and Alt A mortgage backed holdings of £41m, including £6m exposure to structured investment vehicles. There are also sub-investment grade ABS holdings of £3m.
-
Commercial Mortgage Backed Securities of £613m with an average credit rating of AA.
-
Residential Mortgage Backed Securities of £468m with an average credit rating of AAA.
Page 15
-
Total CDO holdings of £1,040m, with an average credit rating of AAA on the Moody's methodology. The holdings are internally managed, with a reference portfolio of investment grade US and European corporate bonds.
Shareholder exposure to sub-investment grade monoline wrapped credit was very limited, representing approximately 0.5% of the total portfolio of £22.5bn to which shareholders are exposed.
Legal & General diversified its sources of fixed income investment return in 2008 and reduced reliance on UK corporate bonds. The approach enables more active management of the annuity portfolio assets, in particular, the ability to access non UK sectors and diversify issuer specific credit risk. The average duration of new fixed income securities purchased in 2008 as backing assets for new business annuity liabilities was approximately three years less than the existing holdings.
CAPITAL BALANCED SCORECARD AND ANNUAL CAPITAL REVIEW
|
|
Range |
At 30 June 2008 |
At 31 December 2007 |
|
IGD surplus capital |
£3bn-£4bn |
£3.4bn |
£4.1bn |
|
Society surplus capital |
£2.5bn-£3.5bn |
£3.9bn |
£4.4bn |
|
Economic capital |
Strong AA |
Very strong AA |
Very strong AA |
|
Return on embedded value |
Increase over medium term |
10.8%(1) |
8.0% |
(1) Annualised return
It is our practice to undertake a full scenario and stress testing exercise annually. At the interim results last year this analysis led the board to recommend that £1bn of capital was in excess of the business's requirements and should be returned to shareholders by means of a share buyback.
The Board has once again considered the balance sheet position of the Group, and has concluded that it is appropriate to continue, and complete the existing share buyback programme. The Board remains committed to a full annual review of the balance sheet, and to returning capital in excess of foreseeable requirements to shareholders.
Page 16
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