L&G 2002 Interim Results Pt 1
Legal & General Group PLC
25 July 2002
Stock Exchange Release - Part 1
25 July 2002
Legal & General Group Plc
=========================
Interim Results for the six months to 30 June 2002
==================================================
• Legal & General announces 57% growth in UK individual new business
(including ISAs and unit trusts) to £410m annual premium equivalent (APE)
(Note 1).
• Worldwide new business rose by 34% to £498m APE.
• Legal & General Investment Management increased new fund management
business by 20% to £7.2bn and is now the largest manager of pension funds in
the UK.
• Careful management of our business has enabled Achieved Profits from new
UK long term business to grow slightly faster than the strong growth in
volumes.
• The free asset ratio for the UK long term fund stood at 13.4% as at 30
June 2002. This allows for the FSA's recently announced modification to the
resilience test and includes an implicit item.
• Operating profit was broadly unchanged at £365m (1H01: £369m).
• The Board has declared a dividend increase ahead of inflation reflecting
the Group's progressive dividend policy but also recognising the volatility
of equity markets.
Note 1 - Annual Premium Equivalent (APE) is total new annual premiums + 10% of
single premiums.
Group Chief Executive, David Prosser, said: 'These are very positive results for
Legal & General in difficult investment conditions, which have affected
financial services businesses worldwide.
While we are not immune from the impact of stock market falls, the free asset
ratio for the UK long term fund compares favourably with the industry.
Our business model, which recognises consumers' needs for value for money
products, continues to gain support and provides the basis for further
profitable growth.'
Overview of results - Achieved Profits basis
============================================
Legal & General's strategy continues to be focused on providing a broad range of
good value products through multi-channel distribution. The success of that
strategy is reflected in these results, with further growth in volumes, market
share and profit from new business.
• UK new business grew by 38% to £449m APE (1H01: £325m) with the results
reflecting the benefit of our strategic alliances with both Barclays and
Alliance & Leicester. International new business was £49m APE (1H01: £48m),
as growth in the United States was partly offset by lower volumes in Europe.
• The contribution before tax from new worldwide life and pensions business
amounted to £112m, an increase of 15% over the first half of 2001,
reflecting increased new business volumes and a favourable mix of business.
Within that result the contribution before tax from new UK life and pensions
business grew by 22% to £94m, exceeding the 20% growth in sales.
• Our institutional fund management business once again delivered strong
growth in new business, winning £7.2bn of new funds. Operating profit grew
from £31m to £40m.
• The Group's operating profit before tax was broadly stable at £365m (1H01:
£369m). The growth in profit from our UK businesses was offset by lower
profits from overseas life and pensions and a negative contribution from
Other operational income, reflecting increased interest costs and financing
strain arising from the more than doubling in ISA and unit trust business.
• Despite the fall in equity values, funds under management by the Group
exceeded £120bn (1H01: £113bn).
• The Board has declared a dividend of 1.67p, an increase of 2.5% on the
interim dividend paid last year. This rate of increase is ahead of price
inflation and follows our progressive approach to dividends while
recognising the current level and volatility of equity markets.
• Group shareholders' funds amounted to £4,775m at 30 June 2002 (1H01:
£5,311m) after providing £86m for the interim dividend.
The Achieved Profits results follow the methodology issued by the Association of
British Insurers in December 2001. Full details can be found in Part 2.
Capital strength
================
As at 30 June 2002 the free asset ratio for the UK long term fund stood at
13.4%. This allows for the FSA's recently announced modification to the
resilience test and includes an implicit item. If this implicit item is excluded
the ratio falls to 10.2%, compared with 12.1% at 31 December 2001.
From time to time we have indicated the quantum of the with-profits estate in
our UK long-term fund. At 31 December 2001 the market value of assets supporting
with-profits business was £25.2bn (31.12.99: £26.9bn). This amount exceeded that
required to meet guaranteed benefits, expected future bonuses and all other
liabilities. The excess comprises working capital substantially provided by
shareholders over many years and retained in the with-profits fund. At 31
December 2001 this excess amounted to £1.6bn (31.12.99: £2.3bn). The reduction
over the period primarily arose from the fall in the market value of equities.
Analysis of new business
========================
1H 02 1H 01 Increase/
(decrease)
£m £m
New business (APE)
UK life and pensions 318 266 20%
- individual 279 202 38%
- group 39 64 (39)%
UK unit trusts and ISAs 131 59 122%
Total UK 449 325 38%
International life and pensions 49 48 2%
Worldwide (including unit trusts) 498 373 34%
New institutional fund management 7,217 6,012 20%
UK new business
===============
Our UK new business grew by 38% in the first half of 2002 to £449m APE (1H01:
£325m). Within that result, individual new business grew 57% to £410m APE (1H01:
£261m) as we continue to benefit from the impact of new partnerships both large
and small.
Individual life
---------------
Annual premium sales grew to £71m (1H01: £67m), benefiting from the strong
position we have built up in the life protection market. The increasing success
of our Mortgage Club helped to offset the new business impact of our decision to
withdraw our ISA mortgage repayment product in May last year.
Single premium bond sales were up sharply at £776m, an increase of 56%,
reflecting in particular high levels of demand from our new distribution
partners, especially for with-profits bonds. The level of demand has declined in
recent weeks as investors and their advisors have adopted a more cautious
approach in the light of equity market volatility.
Individual pensions
-------------------
Annual premium business continued to grow strongly, increasing by 86% to £93m
(1H01: £50m), as we populate Stakeholder schemes and gain further business from
specialist fee-based advisors. Single premium pension sales were £378m, up from
£353m in the first half of 2001, as we achieved higher volumes of annuity
business.
Unit trusts and ISAs
--------------------
Despite the downturn in total market sales, we have continued to achieve very
strong growth in new business, benefiting from the support of our strategic
partners.
Regular payment business almost doubled to £31m (1H01: £16m). Single payment
sales reached £1,005m, an increase of 134% (1H01: £430m). Demand was strongest
for our UK Index Trust, the Fixed Interest (corporate bond) and High Income
Trusts and for our Protected Portfolio product.
Group business
--------------
Primarily as a consequence of lower volumes of bulk purchase annuities, Group
new business declined by 39% to £39m APE (1H01: £64m). For the first half, bulk
purchase annuity premiums were £175m (1H01: £397m). The decline in demand from
larger pension schemes reflects the impact of falling equity markets on the
funding levels of these schemes. However, we continue to win bulk purchase
business in the small and mid-sized segment of the market. New group annual
premiums were broadly maintained at £18m (1H01: £20m).
Distribution
============
New business volumes have increased in both the IFA and Business Partnerships
channels. However, the proportion of business sold through our Business
Partnerships channel continues to increase due to the impact both of our
strategic partners and the significant numbers of smaller firms which are
continuing to tie to Legal & General.
In June we announced that, from 1 January 2003, Gresham Insurance, which is 90
per cent owned by Legal & General Insurance and 10 per cent owned by Woolwich,
will provide buildings and contents insurance to customers of Barclays. This
extension of the relationship between Barclays and Legal & General builds upon
the success Barclays has achieved in selling Legal & General's savings and
protection products to its customer base and on the long standing general
insurance relationship between Legal & General and Woolwich.
Analysis of profit - Achieved Profits Basis
===========================================
1H 02 1H 01
Profit from continuing operations £m £m
UK life and pensions 277 265
International life and pensions 36 54
Institutional fund management 40 31
General insurance 22 16
Other operational income (13) 1
Discontinuing operations 3 2
----- -----
Operating profit 365 369
Variation from longer term investment return (492) (217)
Change in equalisation provision (3) (3)
Effect of economic assumption changes (1) 36
Profit on sale of Fairmount Group - 8
----- -----
(Loss)/profit on ordinary activities before tax (131) 193
Diluted earnings per share 4.86p 5.14p
(Based on operating profit after tax)
UK life and pensions profit
---------------------------
Operating profit grew 5% to £277m (1H01: £265m). The contribution before tax
from new life and pensions business was up 22% to £94m (1H01: £77m). In a highly
competitive market, we have again written new business which delivers
significant value for our shareholders. As a percentage of APE, the contribution
was 30% (1H01: 29%) as the mix of new business continued to be favourable.
The contribution from in-force business was lower at £103m (1H01: £137m) as a
result of adverse experience variances and assumption changes, in part arising
from poorer persistency for mortgage endowment business. This contrasted with
last year's positive experience variances.
The contribution from shareholder net worth was £83m (1H01: £61m). The increase
was primarily due to the capital injections into the UK long term fund in the
form of subordinated debt.
International life and pensions
-------------------------------
Operating profit from international life and pensions business was £36m (1H01:
£54m), including a new business contribution of £18m (1H01: £20m). The
contribution from in-force business was £10m (1H01: £27m).
In the USA, our business has settled into the post Triple X environment in very
good shape with new annual premium business up by 12% to £29m (an increase of
21% in local currency terms). Operating profit was £20m (1H01: £33m) reflecting
a reduced contribution from the in-force book resulting from higher than
anticipated mortality experience in the period. The new business contribution,
as a percentage of APE, remains relatively high and roughly in line with pre
Triple X margins.
New business volumes in the Netherlands were maintained at £10m APE but
continued to outperform the wider market. In France, where market conditions
remained difficult, new business including unit trusts fell to £10m APE (2000:
£12m). The operating profits of the Dutch and French businesses were £11m (1H01:
£12m) and £5m (1H01: £9m) respectively. The combined contribution from new
business was £6m (1H01: £9m).
Institutional fund management
-----------------------------
In the first half of 2002, our institutional fund management team maintained its
impressive track record, winning a further £7.2bn (1H01: £6.0bn) of new funds.
We continue to benefit from the move to specialist management by larger pension
funds in which an indexed core often forms a substantial part of the assets. We
are gaining an increasing number of bond mandates, for both active and indexed
management, reflecting a shift in asset allocation by UK pension funds.
The profit from institutional fund management was £40m (1H01: £31m). The
contribution from new business declined to £15m (1H01: £17m) reflecting the
changing mix of business.
Funds under management by the Group grew by 6% to £120bn at 30 June 2002 (1H01:
£113bn), of which nearly 60% was held for institutional clients.
General insurance
-----------------
All classes of business have been profitable in the first half of the year,
resulting in 38% growth in operating profit to £22m (1H01: £16m). Net written
premiums grew 14% to £141m (1H01: £124m).
The household account, which represents over three-quarters of net premiums
written, produced an increased operating profit of £8m.
The operating profit for mortgage indemnity business was £5m (1H01: £6m). £2m of
the total profit arose from the release of provisions for pre-1993 mortgage
indemnity contracts where the remaining provision is now £7m.
Other personal lines business produced an operating profit of £9m (1H01: £4m)
with equal contributions from motor, private medical insurance and accident,
sickness and unemployment insurance.
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 loss of £13m (1H01: £1m profit) arose from increased interest expense on a
higher level of debt, the growth of our retail investment business and the costs
related to European developments.
The Group's other operations produced an unchanged loss of £8m. This primarily
reflects the financing costs on our rapidly growing retail investment business,
which is reported on a Modified Statutory Solvency basis, and the impact on this
business of lower equity values on fee income.
Profit on ordinary activities
-----------------------------
The Group's Operating profit from continuing operations before tax was £365m
(1H01: £369m). The result from ordinary activities before tax, which includes
the effect of variances in investment return from the longer-term return assumed
at the end of 2001, was a loss of £131m (1H01: £193m profit). This includes a
negative investment return variance of £492m (1H01: £217m) reflecting the
worldwide fall in equity markets. The largest impact came from UK life and
pensions, where there was a negative variance of £425m (1H01: £154m). The
investment return on the equity and property portfolio was 9.7% below the
assumption for the period. The effect of economic assumption changes resulted in
a decrease of £1m (1H01: £36m increase).
Balance sheet
-------------
At 30 June 2002 the embedded value of the Group's long term businesses was
£5,144m (30 June 2001: £4,609m). At 30 June 2002 Shareholders' funds on the
Achieved Profits basis amounted to £4,775m (30 June 2001: £4,994m) after
providing for the 2002 interim dividend of £86m.
Analysis of profit - Modified Statutory Solvency (MSS) basis
============================================================
1H02 1H01
£m £m
UK life and pensions operating profit 200 176
Worldwide operating profit 265 249
(Loss)/Profit before tax (192) 57
Operating profit grew to £265m (1H01: £249m), reflecting improved results in all
major business areas.
The UK life and pensions operating profit before tax rose to £200m (1H01:
£176m), reflecting a 7% growth in the accrued net transfer from the long term
fund. The transfer for non-profit business is augmented by the distribution in
respect of the intra-group subordinated debt capital attributed to the SRC. The
external servicing cost of that debt has been reflected in interest expense
reported within Other operational income.
The contribution to profit before tax from the SRC in the UK long term fund was
a negative £424m (1H01: £165m). This reflected significantly lower investment
returns and the strain associated with substantial volumes of new non-profit
business, which makes an important contribution to the new business value added
reported in our Achieved Profits results. In addition, following the
introduction of FRS19, the new business strain has been augmented by an
additional requirement in respect of liability to deferred tax.
The operating profit from our overseas life and pensions businesses was £30m
(1H01: £32m). Results for the USA and the Netherlands have benefited from strong
growth in the book of business over recent years. The results for France reflect
the lack of realised gains in current investment markets and strengthening of
regulatory provisions.
Post balance sheet events
=========================
On 4 July 2002 we announced the sale of Legal & General Bank Ltd and Legal &
General Mortgage Services Ltd to Northern Rock for an estimated total of £131m,
subject to regulatory approval. The transactions will generate a pre-tax profit
of £36m (£36m post tax). These banking operations, reported as discontinuing
operations, generated a profit of £3m in the first half of the year (1H01: £2m).
Through a new distribution agreement Northern Rock will manufacture mortgage and
retail deposit products which will be marketed to Legal & General's customer and
agent networks under the Legal & General brand.
We announced today that Alliance & Leicester will sell Legal & General life
protection products from 1 August 2002, extending the highly successful
partnership announced last year under which Alliance & Leicester distributes our
retail savings products. We have also agreed, subject to regulatory approval, to
purchase Alliance & Leicester Life Assurance Company Ltd. The consideration of
approximately £84m represents approximately £30m for the value of in-force
business and £54m for the net assets of the company.
Payment of dividend
===================
The interim dividend of 1.67p per share will be paid on 1 October 2002 to
shareholders registered at the close of business on 13 September. The shares go
ex-dividend on 11 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 020 7638 9571
07973 611888
Notes:
- The statements in Part 2 of this release have been prepared in accordance with
the methodology for Supplementary Accounting for long term insurance business
(The Achieved Profits Method) issued in December 2001 by the Association of
British Insurers in all material aspects. This methodology sets out a more
realistic method for recognising shareholders' profits from long term business
than the MSS basis contained in Part 3. These financial statements have been
reviewed by PricewaterhouseCoopers and prepared in conjunction with our
consulting actuaries - Tillinghast Towers-Perrin and, in the USA, Milliman USA.
- Issued share capital at 30 June 2002 was: 5,159,310,045 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:
-------------------
Third quarter 2002 new business results 16 October 2002
Full year 2002 new business results 23 January 2003
Preliminary results for 2002 27 February 2003
Annual General Meeting and first quarter 2003 new business 30 April 2003
results
Interim results for 2003 and second quarter new business 24 July 2003
results
Third quarter 2003 new business results 15 October 2003
This information is provided by RNS
The company news service from the London Stock Exchange
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