L&G Interim Results Part 1
Legal & General Group PLC
28 July 2005
Stock Exchange Release - Part 1
28 July 2005
LEGAL & GENERAL GROUP PLC
INTERIM RESULTS FOR THE SIX MONTHS TO 30 JUNE 2005
HIGHLIGHTS
• Worldwide new business increased by 28%
• Society's resources of £7.6bn exceeded requirement by £4.4bn
• Group funds under management grew to over £181bn
• Profit before tax on an IFRS basis increased to £476m
• Dividend increased by 2.5% to 1.65p per share
EEV* basis IFRS** basis
1H 05 1H 04 1H 05 1H 04
£m £m £m £m
Operating profit 465 265*** 299 272
Profit from continuing operations before tax 693 346 476 104
Shareholders' equity 6,173 5,691 3,793 3,398
Worldwide new business APE+ 652 511 652 511
Contribution from new business++ 140 130 N/A N/A
Shareholders' equity per share 95p 87p 58p 52p
Earnings per share (diluted)+++ 4.98p 3.00p 3.15p 3.00p
Interim dividend per share 1.65p 1.61p 1.65p 1.61p
Group Chief Executive, Sir David Prosser, said:
'Legal & General has again produced another good set of results, with excellent
sales growth, increased profits and an increased dividend, whilst enhancing its
strong capital position.
Our UK retail savings and protection business has continued to take market
share, with both life and pensions and unit trusts performing well. We have
strong support for our products and services from all distribution channels and
we believe our joint venture with Cofunds to develop their multi-manager
platform will further strengthen our position for the future.
Legal & General Investment Management has maintained its outstanding record of
new business growth and in this half year increased IFRS profits by 38% over
the first half of 2004.
With a strong capital base, a broad product range and a powerful distribution
franchise, Legal & General is in an exceptional position to continue with its
profitable growth strategy.'
Notes
* European Embedded Value (EEV). The EEV results have been prepared in
accordance with the EEV Principles issued in May 2004 by the European CFO Forum.
** International Financial Reporting Standards (IFRS).
*** After a net charge of £176m for experience variances and operating
assumption changes principally relating to the adoption of more conservative
mortality experience assumptions for annuity business.
+ Annual Premium Equivalent (APE) is total new annual premiums + 10% of single
premiums, including ISAs and unit trusts.
++ Contribution before tax from new worldwide life and pensions business after
the cost of capital.
+++ Based on operating profit after tax and assuming full dilution from the
convertible bond issued in 2001.
Full details of the results can be found in Parts 2 (EEV), 3 (IFRS) and 4 (Legal
& General Investment Management).
NEW BUSINESS
£m (APE) 1H 05 1H 04 2Q 05 2Q 04
UK life and pensions:
- individual 349 277 191 146
- group 77 62 27 39
------- ------- ------- -------
- total 426 339 218 185
UK ISAs and unit trusts 169 115 94 76
------- ------- ------- -------
Total UK 595 454 312 261
International 57 57 32 35
------- ------- ------- -------
Worldwide (including unit trusts) 652 511 344 296
------- ------- ------- -------
New institutional fund management (£m) 6,875 8,743 3,462 3,312
UK
During the first half of the year, new business volumes grew by 31% to £595m APE
(1H04: £454m). Within this figure, new life and pensions business grew by 26% to
£426m APE (1H04: £339m). Continuing growth in demand for retail products in the
second quarter resulted in a 20% growth in total new business over the
corresponding period last year to £312m APE (2Q04: £261m) and a 10% growth on
the first quarter of 2005.
Individual life
Annual premium sales for mortgage related protection business fell to £43m
(1H04: £53m) reflecting the impact of a slowing housing market offset partly by
the distribution of our products through Bradford & Bingley, which commenced in
January. Other protection business was broadly unchanged at £24m (1H04: £25m).
Despite lower overall volumes and increased price competition, we are confident
Legal & General will have maintained its market-leading position in life
protection business.
Continued strong demand for unit-linked bonds, where first half volumes rose 58%
on the corresponding period last year, more than offset the decline in
with-profits bond sales. Our Distribution and Property funds continue to be the
focus of customer interest but further product initiatives are planned for the
second half of the year. In aggregate, single premium sales rose to £1,042m
(1H04: £820m), an increase of 27%.
Individual pensions
Individual pension business made further progress. Annual premiums increased by
36% to £83m (1H04: £61m) and single premium new business was up 69% to £948m (1H
04: £562m). Sales benefited from growth in both pensions transfers and
individual annuity business. We expect the transfer market to remain buoyant
ahead of the introduction of pension simplification in April 2006. Our product
range will be expanded with the introduction of a new Self Invested Pension Plan
in August.
ISAs and Unit trusts
While regular and single payment ISA sales fell, single payment unit trust sales
more than doubled to £1,304m. In total, ISA and unit trust sales grew to £169m
APE (1H04: £115m). We achieved £27m APE of institutional sales (1H04: £37m) and
also benefited from the restructuring of a number of Barclays UK funds, the
effect of which was to generate £58m APE in new business to Legal & General.
Group business
Group new business increased by 24% to £77m APE (1H04: £62m), driven by further
progress in our group risk business together with strong bulk purchase annuities
sales in the first quarter. Group risk new annual premiums of £42m (1H04: £37m)
were driven by a particularly strong first quarter when several larger schemes
were won. Single premiums for bulk purchase annuity business were £329m (1H04:
£230m) from 115 schemes (1H04: 92 schemes).
International
In the USA, new business was lower at £19m APE (1H04: £27m) in more challenging
market conditions. New business volumes in Europe were resilient and, including
retail investment business, grew to £38m APE (1H04: £30m). Our performance in
the Netherlands was driven by growth in single premium sales. In France we
achieved good progress in savings and group protection sales.
Legal & General Investment Management
Legal & General Investment Management has maintained its remarkable record of
averaging £1bn of new business per month, with new business in the first half
totalling £6,875m (1H04: £8,743m, which included one particularly large mandate
for £1.7bn). Successes in the current year included sales of £758m of actively
managed bonds. Also, £721m of index fund business was generated from overseas
customers as we continued to broaden the product range and geographic sources of
our business.
PROFIT - EEV BASIS
1H 05 1H 04
£m £m
Profit from continuing operations:
UK life and pensions 340 153*
International life and pensions 45 31
Institutional fund management 66 51
General insurance 4 17
Other operational income 10 13
----------- ----------
Operating profit 465 265
Variation from longer term investment return 206 80
Effect of economic assumption changes 11 (7)
Property income attributable to minority interests 11 8
----------- ----------
Profit from continuing operations before tax 693 346
Tax (182) (100)
Effect of UK tax changes (276) -
----------- ----------
Profit from continuing operations after tax 235 246
Profit from discontinued operations 13 2
Profit attributable to minority interests (11) (8)
----------- ----------
Profit attributable to equity holders 237 240
----------- ----------
Diluted earnings per share ** 4.98p 3.00p
* After a net charge of £176m for experience variances and operating
assumption changes principally relating to the adoption of more conservative
mortality experience assumptions for annuity business.
** Based on operating profit after tax.
UK life and pensions
Operating profit was £340m (1H04: £153m). Growth in life and pensions volumes
enabled the new business contribution before tax and after the cost of capital
to increase to £129m (1H04: £120m). The margin on UK new business (expressed as
the value added from new business divided by the present value of new business
premiums) was 4.1% (1H04: 5.0%) as the consequence of a different business mix,
reduced margins on protection business and the impact of the UK tax changes.
The contribution from in-force business of £152m was closely aligned to the
expected return with no significant experience variances or operating assumption
changes. In 2004, the in-force value decreased by £38m following the adoption of
revised annuitant mortality assumptions.
International life and pensions
Operating profit from international life and pensions business was £45m (1H04:
£31m), including a new business contribution of £11m net of the cost of capital
(1H04: £10m). The contribution from in-force business was £26m (1H04: £14m).
In the USA, operating profit was £19m (1H04: £11m) despite the level of claims
exceeding the assumed level. The contribution from new business in the first
half of 2005 was £3m (1H04: £1m) and has been calculated assuming no external
financing for Triple X reserves. A securitisation transaction to finance such
reserves on 2003 and 2004 new business was implemented successfully in the final
quarter of 2004.
The operating profit was £16m in the Netherlands (1H04: £14m) and £10m in France
(1H04: £6m). The combined contribution from new business after the cost of
capital was £8m (1H04: £9m).
Legal & General Investment Management
The profit from our fund management business grew by 29% to £66m (1H04: £51m),
with improved results for both new and in-force business for managed pension
funds. The contribution from new managed pension fund business after the cost of
capital was £21m (1H04: £17m) reflecting higher average fee rates on that new
business. The result for in-force business benefited from both the increased
scale of the business and better than assumed persistency.
Group funds under management grew to a record £181bn at 30 June 2005 (30 June
2004: £148bn). Funds under management by Legal & General Investment Management
were £178bn (30 June 2004: £146bn) of which £116bn was managed for external
clients.
General insurance
Gross written premiums from continuing operations grew 8% to £170m (1H04: £158m)
with the growth coming from the household and healthcare business lines.
The operating profit on continuing operations was significantly lower at £4m
(1H04: £17m). The main impact was the reduced operating profit of £2m (1H04:
£11m) from the household account which reflected higher bad weather claims.
Other factors contributing to the overall result were a smaller release of
reserves from the mortgage indemnity book and a loss on our motor account.
The previously announced sale of our 90% stake in Gresham Insurance Company Ltd
to Barclays Bank PLC was completed on 31 March 2005. The sale and first quarter
trading result gave rise to a profit from discontinued operations of £13m after
tax.
Other operational income
Other operational income comprises the longer term investment return arising
from investments held outside the UK long term fund, interest expense, the
results of the Group's other operations and unallocated corporate expenses. The
contribution of £10m (1H04: £13m) reflects higher interest expense, the impact
of which has been partly offset by lower unallocated corporate and development
expenses.
Profit on ordinary activities
The Group's operating profit before tax was £465m (1H04: £265m). The profit from
continuing operations before tax, which includes the effect of variances in
investment return from the longer term return assumed at the end of 2004, was
£693m (1H04: £346m). The investment return on the equity and property portfolio
of the UK long term fund was 3.7% above the assumption for the period (1H04:
0.9% above assumption).
On 3 December 2004, we reported that one proposed change to the taxation of UK
life business would result in a one-off reduction in the embedded value of our
UK long term fund. Legislation was included in the second Finance Act 2005,
which received Royal Assent on 20 July 2005. The EEV results are computed
assuming current tax rules and any known future changes. The impact is presented
in the EEV income statement as additional tax of £276m. The tax charge in the
IFRS results does not reflect the change, as it was not substantively enacted at
30 June 2005.
PROFIT - IFRS BASIS
1H 05 1H 04
£m £m
Profit from continuing operations:
Life and pensions 241 210
Institutional fund management 44 32
General insurance 4 17
Other operational income 10 13
---------- ----------
Operating profit 299 272
Variation from longer term investment return 50 (26)
Shareholder retained capital (SRC) movement 116 (150)*
Property income attributable to minority interests 11 8
---------- ----------
Profit from continuing operations before tax 476 104
Tax (120) (30)
---------- ----------
Profit from continuing operations after tax 356 74
Profit from discontinued operations 13 2
Profit attributable to minority interests (11) (8)
---------- ----------
Profit attributable to equity holders 358 68
---------- ----------
Diluted earnings per share ** 3.15p 3.00p
* After a charge from the previously announced adoption of more
conservative mortality reserving assumptions for annuity business, which was
partly offset by other releases.
** Based on operating profit after tax.
Operating profit was £299m (1H04: £272m), benefiting from substantially
increased profit from institutional fund management and from the impact of
favourable investment variances in overseas life and pensions.
The UK life and pensions operating profit before tax was £183m (1H04: £178m), as
the slightly lower with-profits contribution was more than offset by an
increased transfer from the non profit business. The accrued transfer from non
profit business has been determined by reference to a smoothed investment return
on both the shareholder net worth and the embedded value of non profit business,
augmented by the distribution in respect of the intra-group subordinated debt
capital attributed to the SRC. The external servicing cost of the related debt
has been reflected in interest expense reported within other operational income.
The operating profit from our overseas life and pensions businesses was £58m
(1H04: £32m). This was primarily as the result of a significantly increased
contribution from the Netherlands where, under IFRS, assets but not liabilities
are valued at fair value.
Legal & General Investment Management profits grew by 38% to £44m (1H04: £32m).
The result reflected the increased scale of the business and tightly controlled
costs.
In aggregate, the SRC increased by £116m pre-tax (1H04: a reduction of £150m).
This reflected the impact of improved investment returns, the net capital
released from the growing book of non profit business and the transfer to
shareholders from non profit business. The new business strain on higher volumes
of non profit business was broadly offset by the expected release of capital
from the existing book of business.
CAPITAL STRENGTH
Legal & General remains one of the strongest companies in its sector. Our
capital position underpins our ability to continue to grow new business volumes
profitably.
As at 30 June 2005, the value of the assets supporting the UK with-profits
business was estimated to have exceeded realistic liabilities by £970m (31
December 2004: £860m). The required Risk Capital Margin (RCM) for the
with-profits fund, calculated by reassessing realistic assets and liabilities in
financially stressed conditions, was £470m at 30 June 2005 (31 December 2004:
£640m). The RCM has fallen significantly, primarily as a result of management
actions taken during the first half of 2005 to reduce the with-profits fund's
exposure to financial risks.
The total capital resources available to Legal & General Assurance Society Ltd
(the Group's main UK operating subsidiary) amounted to £7.6bn at 30 June 2005
(£7.0bn at 31 December 2004), which included an implicit item of £755m in
respect of non profit business, and exceeded the total capital requirement by
£4.4bn (£4.0bn at 31 December 2004).
At Group level, the Insurance Group Directive capital surplus was £1.9bn in
excess of the required capital of £3.4bn.
CHIEF EXECUTIVE SUCCESSION
Tim Breedon was appointed Deputy Group Chief Executive with effect from 1 June
2005. Sir David Prosser will stand down from the Group Board at the end of the
year but will remain in the employment of the Group until his retirement in
March 2006. Tim Breedon will assume the role of Group Chief Executive from 1
January 2006.
OUTLOOK
The UK market will continue to offer opportunities to grow our business and we
expect to outperform the market in the second half. However, second half
comparators are more demanding so the growth rate is likely to be lower.
Life protection sales will continue to be impacted by the level of housing
market transactions but re-mortgaging activity remains relatively resilient.
Unit-linked bond sales have been strong reflecting increasing consumer
confidence as equity markets recover. We expect demand for medium term savings
products to be further supported by rising equity values and to benefit from the
extension of our product range.
Pension sales have been buoyant in the first half and we would expect the
Government's initiatives on pension simplification to have a positive impact in
2006. Despite this, the overall level of saving for retirement is insufficient
to meet the Government's policy objectives. We look forward to the second report
of the Pensions Commission to be published in the autumn, which will make
recommendations to address the issues identified in the initial report.
The advent of depolarisation has led advisors to review their distribution
models. A number of IFA networks have developed a multi-tie capability and we
were pleased that Sesame recently announced Legal & General's inclusion in their
multi-tie panel. Home of Choice, the independent mortgage network, has announced
today that Legal & General has been appointed to its mortgage protection panel.
Our partnership with Cofunds will allow independent advisors to use the Cofunds
platform to offer multi-manager choice within Legal & General bond and pensions
products. A Legal & General branded version of the platform will offer that
flexibility to tied advisors and has been adopted by Bradford & Bingley for
their Portfolio Bond.
These important developments reinforce the strength and breadth of Legal &
General's product range and distribution capabilities. We also believe that
further market share concentration will provide Legal & General with good
opportunities for profitable growth. We have the combination of products, brand,
financial strength and distribution to be able to take full advantage of these
opportunities.
Enquiries to:
Investors:
Andrew Palmer, Group Director (Finance) 020 7528 6286
Peter Horsman, Head of Investor Relations 020 7528 6362
Nicola Marshall, Investor Relations Manager 020 7528 6263
Media:
John Morgan, Media Relations Director 020 7528 6213
Anthony Carlisle, Citigate Dewe Rogerson 07973 611888
Notes:
- The interim financial information has been reviewed by
PricewaterhouseCoopers LLP and prepared in conjunction with our consulting
actuaries - Tillinghast Towers-Perrin and, in the USA, Milliman USA.
- Issued share capital at 30 June 2005 was 6,506,191,429 shares of 2.5p
each.
- A copy of this announcement can be found in the News and Results
section of our Shareholder site at http://investor.legalandgeneral.com/
releases.cfm
- A presentation to analysts and fund managers will take place at 09.30
today at Temple Court, 11 Queen Victoria Street, London EC4N 4TP. An audio cast
of the presentation be available later today at
http://investor.legalandgeneral.com/presentations.cfm
Financial Calendar:
Ex dividend date for interim dividend 7 September 2005
Record date for interim dividend 9 September 2005
Payment date for interim dividend 3 October 2005
Third quarter new business results 20 October 2005
Note: a Dividend Re-investment Plan is available to shareholders
This information is provided by RNS
The company news service from the London Stock Exchange
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