Interim Results 2004 - Part 1
Legal & General Group PLC
29 July 2004
Stock Exchange Release - Part 1
29 July 2004
Legal & General Group Plc
=========================
Interim results for the six months to 30 June 2004
==================================================
• Second quarter UK new business up 27% on 2003
• Record half year for fund management new business at £8.7bn
• Group funds under management exceed £148bn
• Financially strong - significantly increased with-profits realistic
surplus
• Dividend increased by 2.5% to 1.61p per share
Group Chief Executive, David Prosser, said: 'These are encouraging results. New
business has grown strongly across almost all areas of the Group. Although the
annuity reserving changes have held back pre-tax profits, underlying profit
performance has been good.
Legal & General is one of the strongest companies in the sector and is well
positioned to benefit from the opportunities the market offers. We have had a
good first six months; we believe that once again we have taken market share
profitably and we expect to continue to do so.'
Summary of results
------------------
Achieved Profits basis Modified Statutory
Solvency basis
1H 04 1H 03 1H 04 1H 03
Operating profit £292m(1) £365m £284m £258m
Shareholders' funds £5,723m £5,260m £3,198m £3,259m
Earnings per share (diluted) (2) 3.20p 3.92p 3.08p 2.75p
Worldwide new business APE (3) £511m £453m £511m £453m
Contribution from new business (4) £151m £150m N/A N/A
Interim dividend per share 1.61p 1.57p 1.61p 1.57p
Notes:
(1) After a charge of £240m from the previously announced adoption of more
conservative mortality experience assumptions for annuity business.
(2) Based on operating profit after tax and assuming full dilution from the
convertible bond issued in 2001.
(3) Annual Premium Equivalent (APE) is total new annual premiums + 10% of single
premiums, including ISAs and unit trusts.
(4) Contribution before tax from new worldwide life and pensions business.
The Achieved Profits results are based on the methodology issued by the
Association of British Insurers in December 2001. Full details of the results
can be found in Parts 2 (Achieved Profits), 3 (MSS) and 4 (Legal & General
Investment Management).
UK overview and outlook
-----------------------
Returning consumer confidence and continued success in building distribution
are, we believe, the prime reasons behind the second quarter growth in our UK
business. New business APE was 27% above the corresponding period last year and
35% ahead of the first quarter this year.
Strongest growth in retail business has come from the IFA sector where the
increased effort referred to last year has delivered excellent results,
particularly from investment products. This brought new business from this
channel to £234m APE (1H03: £188m), an increase of nearly 25%. In our Business
Partnerships division, which recorded new business of £118m APE (1H03: £123m),
mortgage-related protection business remained the strongest area of sales.
There has been some change in product mix over the last year. Overall, bond
sales increased as demand for unit linked products has grown significantly but
with-profit bond sales fell. Bulk purchase annuity sales, which are lumpy, were
down by more than a third from last year.
Continued pricing discipline resulted in a return on capital of 19% on new UK
life and pensions business. Primarily as a result of changes in the mix of
business the value to premium ratio fell from 46% in 2003 to 40% in the first
half of 2004.
We believe the market outlook is encouraging. Protection sales are expected to
remain buoyant and we believe individual investors will increasingly look to
bonds and equities for their long-term savings. At the same time, we expect
pricing discipline to be maintained.
The Government and the FSA are consulting on a series of proposals, which if
implemented, will have a significant impact on our industry's products and
distribution. We believe the sector consolidation will continue and this will
continue to provide Legal & General with good opportunities to achieve further
profitable growth. We have the combination of products, brand, financial
strength, distribution and experience to be able to take full advantage of the
opportunities ahead.
Analysis of new business (APE)
------------------------------
1H 04 1H 03 2Q 04 2Q 03
£m £m £m £m
UK life and pensions:
- individual 277 231 146 116
- group 62 52 39 19
------- ------- ------- -------
- total 339 283 185 135
UK ISAs and unit trusts 115 122 76 70
------- ------- ------- -------
Total UK 454 405 261 205
International 57 48 35 25
------- ------- ------- -------
Worldwide (including unit trusts) 511 453 296 230
------- ------- ------- -------
New institutional fund management 8,743 5,980 3,312 3,152
UK new business
---------------
Strong growth in demand for both retail and group business in the second quarter
resulted in a 27% growth in new business over the corresponding period last year
and 35% growth on the first quarter of 2004. During the half-year, new business
volumes grew by 12% to £454m APE (1H03: £405m). Within this figure, new life and
pensions business grew by 20% to £339m APE (1H03: £283m).
Individual life
---------------
Annual premium sales continued to benefit from the strong position we have built
up in the life protection market, growing by 10% to £78m (1H03: £71m).
Single premium bond sales were 59% higher at £820m (1H03: £515m). Unit linked
bond sales more than trebled offsetting lower with-profits sales.
Individual pensions
-------------------
Individual pension business made further progress, with annual premiums
increasing by 7% to £61m (1H03: £57m) and single premium new business up 9% to
£562m (1H 03: £516m), benefiting from growth in pensions transfers and
individual annuity sales.
ISAs and Unit trusts
--------------------
Investment sales in the second quarter, which benefited from increased demand
from both retail and institutional investors, grew from £39m APE in the first
quarter to £76m. Despite the second quarter increase, sales in the first half of
the year as a whole declined by 6% to £115m APE (1H03: £122m). Although regular
payment business fell to £14m (1H03: £19m), single payment sales held up at
£1,010m (1H03: £1,025m).
Group business
--------------
Group new business increased by 19% to £62m APE (1H03: £52m). We have benefited
from strong growth in group risk premiums as the market concentrates on a
smaller number of providers. Bulk purchase annuity single premiums were higher
in the second quarter than the first but over the first half were still below
the corresponding period last year at £230m (1H03: £367m).
Analysis of profit - Achieved Profits Basis
-------------------------------------------
1H 04 1H 03
£m £m
Profit on continuing operations:
UK life and pensions 165(1) 260
International life and pensions 40 46
Institutional fund management 50 37
General insurance 20 19
Other operational income 17 3
------- -------
Operating profit 292(1) 365
Variation from longer term investment return 88 86
Change in equalisation provision (4) (4)
Effect of economic assumption changes (11) (8)
Effect of UK Budget tax changes - (27)
------- -------
Profit on ordinary activities before tax 365(1) 412
------- -------
Diluted earnings per share 3.20p 3.92p
(Based on operating profit after tax)
(1) After a charge of £240m from the previously announced adoption of more
conservative mortality experience assumptions for annuity business.
UK life and pensions profit
---------------------------
Operating profit was £165m (1H03: £260m). The contribution from in-force
business fell by £240m pre tax as a result of the more conservative annuitant
mortality assumptions announced on 2 July. This was partly offset by other
operating assumption changes of £28m and by favourable experience variances of
£40m.
Strong growth in life and pensions volumes enabled the new business contribution
before tax to grow to £134m (1H03: £131m) despite the adoption of the more
conservative annuitant mortality assumptions previously announced. Although
pricing discipline was maintained, the combination of business mix and these
revised assumptions caused the contribution, expressed as a percentage of APE,
to fall to 40% (1H03: 46%).
International life and pensions
-------------------------------
Operating profit from international life and pensions business was £40m (1H03:
£46m), including a new business contribution of £17m (1H03: £19m). The
contribution from in-force business was £18m (1H03: £20m).
In the USA, new business was broadly stable in sterling terms at £27m APE (1H03:
£28m) but increased 7% in local currency terms. Operating profit was £18m (1H03:
£28m) as the level of claims exceeded the assumed level. The new business
contribution, as a percentage of APE, was 25% (1H03: 41%) as the Triple X
reserves were carried directly, pending the completion of a financing
arrangement to supplement the existing reinsurance arrangements.
New business volumes in Europe were resilient and, including retail investment
business, grew to £30m APE, (1H03: £20m). The result in the Netherlands was
driven mainly by growth in single premiums and in France good progress was made
in life and pensions sales. The operating profit was £15m in the Netherlands
(1H03: £14m) and £7m in France (1H03: £4m). The combined contribution from new
business was £10m (1H03: £7m).
Legal & General Investment Management
-------------------------------------
Legal & General Investment Management maintained its impressive track record,
winning a further £8.7bn of new funds in the first half of 2004 (1H03: £6.0bn),
with particularly strong performance in the first quarter. We continued to win
an increasing number of bond mandates for both active and indexed management.
The profit from our fund management business grew by 35% to £50m (1H03: £37m),
with improved results for both new and in-force business for managed pension
funds and an increased contribution of £6m (1H03: £5m) from venture capital and
other external clients. The contribution from new business from managed pension
funds was £17m (1H03: £12m) reflecting the significant increase in new business
volumes.
Group funds under management grew to a record £148bn at 30 June 2004 (30 June
2003: £124bn). Funds under management by Legal & General Investment Management
were £146bn (30 June 2003: £123bn).
Further information on the performance of Legal & General Investment Management
can be found in Part 4 of this announcement.
General insurance
-----------------
Net written premiums grew 17% to £215m (1H03: £184m) as the existing joint
venture with the Woolwich was extended further to customers of Barclays Bank.
Legal & General is now one of the top five household insurers in the UK.
The household account, which represents nearly 80% of net premiums written,
produced an increased operating profit of £13m (1H03: £10m). The total operating
profit at £20m (1H03: £19m) reflected a lower profit from other business as the
contribution from the mature mortgage indemnity book continues to decline.
Other operational income
------------------------
Other operational income comprises the longer term investment return arising
from investments held outside the UK long term fund, interest expense,
unallocated corporate expenses and the results of the Group's other operations.
The significantly increased contribution of £17m (1H03: £3m) reflects an
improved investment return and a reduced loss of £1m (1H03: £11m loss) from our
retail investment business.
Profit on ordinary activities
-----------------------------
The Group's operating profit on continuing operations before tax was £292m
(1H03: £365m). The profit from ordinary activities before tax, which includes
the effect of variances in investment return from the longer term return assumed
at the end of 2003, was £365m (1H03: £412m). The investment return on the equity
and property portfolio of the UK long term fund was 0.9% above the assumption
for the period (1H03: 2.8% above assumption).
Balance sheet
-------------
At 30 June 2004, the embedded value of the Group's long term businesses was
£5,329m (31 December 2003: £5,215m). At 30 June 2004, shareholders' funds on the
Achieved Profits basis amounted to £5,723m (31 December 2003: £5,584m),
equivalent to 88p per share (31 December 2003: 86p per share). This increase of
2.5% was achieved after providing for both the 2004 interim dividend of £104m
and the revised mortality assumptions.
Analysis of profit - Modified Statutory Solvency (MSS) basis
------------------------------------------------------------
1H 04 1H 03
£m £m
Profit on continuing operations:
Life and pensions operating profit 215 211
Institutional fund management 32 25
General insurance 20 19
Other operational income 17 3
------- -------
Operating profit 284 258
Variation from longer term investment return (26) 20
Change in equalisation provision (4) (4)
Change in shareholder retained capital (SRC) (170) (30)
------- -------
Profit before tax 84(1) 244
------- -------
Diluted earnings per share 3.08p 2.75p
(Based on operating profit after tax)
(1) After a charge from the previously announced adoption of more conservative
mortality reserving assumptions for annuity business, which was partly offset by
other releases.
Operating profit was £284m (1H03: £258m), reflecting improved results from all
business areas.
The UK life and pensions operating profit before tax was £178m (1H03: £174m), as
the impact of lower levels of with-profit bonuses was more than offset by an
increased transfer from the growing book of non profit business. The accrued
transfer from non profit business has been calculated as a smoothed investment
return on 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
unchanged at £37m with a reduced contribution from the USA offset by increased
profits from Europe.
Legal & General Investment Management saw strong growth in statutory profits.
These increased by 28% to £32m (1H03: £25m) reflecting a combination of higher
volumes, higher market levels and tightly controlled costs.
Adopting the more conservative reserving basis for UK annuity business announced
on 2 July led to a reduction in SRC of £290m net of tax. However, this reduction
was partially offset by releases from other reserves, together with the impact
of improved asset/liability matching and other actions.
In aggregate, the movement in SRC was a pre tax reduction of £170m (1H03: a
reduction of £30m). This reflected the impact of reduced investment returns, the
net capital invested in non profit business of £91m (including the effect of the
reserving changes outlined above) and the transfer to shareholders from non
profit business.
Capital strength
----------------
Legal & General continues to be one of the strongest companies in its sector.
Reserves are reviewed regularly to ensure an appropriate level of prudence is
used in each product area. Our capital position underpins our ability to
continue to grow new business volumes profitably.
At 30 June 2004, the value of the assets supporting the UK with-profits business
was estimated to have exceeded realistic liabilities by £1.0bn.
The Risk Capital Margin (RCM) required has reduced from £960m at 31 December
2003 to an estimated £400m at 30 June 2004 mainly as a consequence of a change
in investment policy for those assets in the with-profits fund which are held
over and above asset shares. The investment policy for asset shares remains
unchanged. The RCM has been calculated on the basis of ABI guidance used at the
year end except that, more prudently, a full 20% equity stress test has been
used.
The RCM was covered 2.5 times by the realistic with-profits estate and at least
10 times by the total surplus assets in Legal & General Assurance Society.
As at 30 June 2004, the Form 9 ratio for Legal & General Assurance Society was
14.0% (31 December 2003: 13.0%). This includes an implicit item of £1.0bn but
makes no use of the realistic waivers granted by the FSA last year. Excluding
the implicit item, the ratio was 11.5%. The ratio at 30 June reflects the more
conservative mortality basis adopted for annuity business, the impact of which
was more than offset by a reduction in the required resilience reserves.
Payment of dividend
-------------------
The interim dividend of 1.61p per share will be paid on 1 October 2004 to
shareholders registered at the close of business on 10 September. The shares go
ex-dividend on 8 September. A Dividend Re-investment Plan is available to
shareholders.
Enquiries to:
-------------
Investors:
----------
Andrew Palmer, Group Director (Finance) 020 7528 6286
Peter Horsman, Head of Investor Relations 020 7528 6362
Media:
------
John Morgan, Head of Public Relations 020 7528 6213
Anthony Carlisle, Citigate Dewe Rogerson 07973 611888
Notes:
- These financial statements have 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 2004 was 6,505,016,878 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
- The results presentation to analysts and fund managers will also be available
later today at http://investor.legalandgeneral.com/presentations.cfm
Financial Calendar:
-------------------
Ex dividend date for interim dividend 8 September 2004
Record date for interim dividend 10 September 2004
Payment date for interim dividend 1 October 2004
Third quarter 2004 new business results 20 October 2004
This information is provided by RNS
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