L&G Full Year 2004 Results
Legal & General Group PLC
24 February 2005
Stock Exchange Release - Part 1
24 February 2005
Legal & General Group Plc
=========================
Results for the year ended 31 December 2004
===========================================
• Record new business - over £1 billion APE (Note 1)
• Continued increase in share of UK retail market - up 0.9% to 9.5%
• Operating profit - AP up 4% / MSS up 9%
• Record funds under management - up 20% to £166 billion
• Positive outlook for 2005
Achieved Profits Modified Statutory Solvency
(AP) basis (MSS) basis
2004 Change 2004 Change
Operating profit before tax £789m +4% £608m +9%
Profit on ordinary activities
before tax (Note 2) £1,222m +9% £646m +38%
Shareholders' funds (Note 3) £6,116m +10% £3,376m +4%
Earnings per share
(diluted) (Note 4) 8.57p +3.5% 6.61p +10.2%
Worldwide new business APE £1,008m +14% £1,008m +14%
Contribution from new
business (Note 5) £317m +4% N/A N/A
Total dividend per share 5.06p +3.3% 5.06p +3.3%
Group Chief Executive, David Prosser, said:
'Legal & General has delivered another strong set of results with good
performance both in the UK and abroad. In the UK, we have again significantly
grown our market share, reflecting the quality of our products, wide
distribution, our efficient business model and our strong brand. Our
investment management business has built further on its outstanding track record
with impressive growth in funds under management and in profits. During 2004,
customers placed over £22 billion with Legal & General, a powerful demonstration
of the confidence placed in our brand.
'We have maintained pricing discipline and have produced increased profits while
significantly strengthening annuity reserves at the interims. Legal & General's
financial strength, spread of profitable businesses and operating performance
enabled us to maintain our policy of growing dividends and to continue investing
in growth.
'Looking ahead, we expect to benefit from improving market conditions and, in
the UK, to continue growing market share profitably.'
Footnotes:
1) Annual Premium Equivalent (APE) is total new annual premiums + 10% of single
premiums, including ISAs and unit trusts.
2) Urgent Issues Task Force abstract 38 'Accounting for ESOP trusts' has been
adopted and shareholders' investment return for Institutional fund management
has been reported as a longer term rate of return within operating profit.
2003 comparatives have been restated accordingly.
3) Shareholders' funds after providing for dividends.
4) Based on operating profit after tax, assuming full dilution from the
convertible bond issued in 2001.
5) Contribution before tax from new worldwide life and pensions business.
The Achieved Profits highlights 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 (AP), 3 Modified Statutory Solvency
basis (MSS) and 4 Legal & General Investment Management.
Overview of results
===================
Legal & General's UK strategy continues to be focused on providing a broad range
of competitive products through multi-channel distribution with good customer
service. The consistent application of our business model has enabled us to
build sustainable business relationships and has brought about significant
market share gains.
• The Group's operating profit before tax on an Achieved Profits basis increased
to £789m (2003: £761m) after the previously announced £240m strengthening of
mortality experience assumptions for UK annuity business.
• The return on capital on new non profit UK life and pensions business for the
full year was maintained at the first half level of 18%.
• The overseas life businesses have achieved good growth in new business and
increased profits.
• Legal & General Investment Management increased new business, funds under
management and profits. It is now the largest manager of UK pension funds and
the largest investor in the UK equity market.
• Group funds under management at the year end grew by 20% to £166bn reflecting
both new business success and equity market recovery.
• Shareholders' funds on an Achieved Profits basis, after providing for
dividends, increased to £6,116m (2003: £5,584m), equivalent to 94p per share
(2003: 86p per share).
• The Board has recommended a final dividend of 3.45p per share, an increase of
3.6%. The total dividend for the year has, therefore, increased by 3.3% to
5.06 per share. The dividend cost of £329m is 1.3 times covered by modified
statutory operating profit after tax.
Analysis of profit - Achieved Profits Basis
===========================================
2004 2003 Restated
£m £m
Profit on continuing operations:
UK life and pensions 494 537
International life and pensions 119 83
Institutional fund management 103 82
General insurance 32 36
Other operational income 34 18
--------- ---------
Operating profit on continuing operations 782 756
Profit on discontinuing operations (Gresham) 7 5
--------- ---------
Operating profit 789 761
Variation from longer term investment return 408 422
Change in equalisation provision (7) (7)
Effect of economic assumption changes 32 (32)
Effect of UK Budget tax changes - (27)
--------- ---------
Profit on ordinary activities before tax 1,222 1,117
========= =========
Diluted earnings per share 8.57p 8.28p
(Based on operating profit after tax)
UK life and pensions profit
---------------------------
Operating profit was £494m (2003: £537m). The contribution from new business
before tax was a little higher at £272m (2003: £271m). This total reflects
significant contributions from a broader range of products. Pricing discipline
was maintained with the return on capital from non profit new business for the
full year being maintained at the first half level of 18%. However, the total
contribution from new business as a percentage of APE was 38% (2003: 46%)
reflecting a different mix of business and the strengthening of annuitant
mortality bases.
The contribution from in-force business was £91m (2003: £117m). This reflected
positive experience variances, primarily from bulk purchase annuity business and
protection business. There was an adverse impact from operating assumption
changes, where the previously announced strengthening of annuitant mortality
assumptions and a provision for possible claims for redress on mortgage
endowment business beyond September 2005 were only partly offset by improved
future experience assumptions for other product lines.
International life and pensions
-------------------------------
Operating profit from international life and pensions business was £119m (2003:
£83m), including an increased new business contribution of £45m (2003: £34m).
The contribution from in-force business grew to £65m (2003: £38m).
In the USA, new business grew 6% to £51m APE (2003: £48m), an increase of 14% in
local currency terms. Operating profit was £73m (2003: £50m) with increased
contributions from both new and in-force business. The new business
contribution, as a percentage of APE, recovered from the first half level of 25%
to 46% for the full year (2003: 40%) as a Triple X capital markets solution was
put in place to finance new business written in 2004 and some older business.
For in-force business, securitisation also had a positive effect on experience
variances. After unfavourable mortality experience in the first quarter, claims
were in line with assumptions over the rest of the year.
New business volumes in Europe were resilient and, including retail investment
business, grew 27% to £56m APE (2003: £44m). The operating profit was £32m in
the Netherlands (2003: £24m) and £14m in France (2003: £9m). The combined
contribution from new business was £21m (2003: £15m).
Legal & General Investment Management
-------------------------------------
Legal & General Investment Management maintained its highly successful track
record, winning new funds of £15.5bn (2003: £13.1bn), with particularly strong
performance in the first quarter. Within this there was a significant increase
in actively managed fixed interest business to £2.5bn (2003: £1.5bn).
The profit from the management of external client funds rose by 26% to £103m
(2003: £82m), with improved results for both new and in-force business for
managed pension funds. The contribution from new managed pension funds business
was £36m (2003: £31m) reflecting the sizeable increase in new business volumes.
The contribution from in-force business benefited from better than assumed
persistency and growing economies of scale. The additional elements of the
business, which were reported on an MSS basis, contributed an additional £12m
(2003: £9m).
Group funds under management grew to a record £166bn at 31 December 2004 (2003:
£138bn). Funds under management by Legal & General Investment Management were
£162bn (2003: £135bn). Further information on the performance of Legal & General
Investment Management can be found in Part 4 of this announcement.
General insurance
-----------------
Net written premiums from continuing operations grew 17% to £295m (2003: £253m)
with the strongest growth coming from broker sourced business.
The operating profit on continuing operations was lower at £32m (2003: £36m).
Within that total, the increased operating profit of £22m (2003: £14m) from the
household account reflected a significantly lower level of subsidence claims
offset in part by higher bad weather claims. The benefit of improved profits
from the household account was more than offset by a smaller release of reserves
from the mature mortgage indemnity book as well as a deterioration in the
performance of our motor account.
On 3 February 2005, it was announced that Legal & General had agreed in
principle to sell its 90% stake in Gresham Insurance Company Ltd to Barclays
Bank PLC, which already owns the remaining 10%, for a consideration of £85m. The
2004 results for Gresham Insurance have been shown as discontinuing operations
with net written premiums of £137m (2003: £134m) and a pre-tax operating profit
of £7m (2003: £5m). The sale, subject to FSA approval, is expected to complete
by 31 March 2005 and to give rise to an exceptional profit of £26m 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,
unallocated corporate expenses and the results of the Group's other operations.
Within the contribution of £34m (2003: £18m), the increased investment return
was only partly offset by higher interest costs. The retail investment business
produced a profit of £4m (2003: a loss of £15m) reflecting the growing
contribution from existing business, pricing discipline and a lower level of new
business strain. The result for other operations includes the set up costs for
Legal & General Partnership Services Ltd, our host company for mortgage
regulation. The increase in unallocated corporate and development expenses
reflects the costs associated with implementing new accounting and capital
adequacy requirements.
Profit on ordinary activities
-----------------------------
The Group's operating profit on continuing operations before tax was £782m
(2003: £756m). 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 £1,222m (2003: £1,117m). The investment return on the
equity and property portfolio of the UK long term fund was 6.9% above the
assumption for the period (2003: 11.4% above assumption).
Balance sheet
-------------
At 31 December 2004, the embedded value of the Group's long term businesses was
£5,707m (31 December 2003: £5,215m). Shareholders' funds on the Achieved Profits
basis grew 10% to £6,116m (31 December 2003: £5,584m), equivalent to 94p per
share (31 December 2003: 86p per share). This increase was achieved after
providing for both the 2004 dividends of £329m and the revised mortality
assumptions.
Analysis of profit - Modified Statutory Solvency (MSS) basis
============================================================
2004 2003 Restated
£m £m
Profit on continuing operations:
Life and pensions operating profit 466 443
Institutional fund management 69 55
General insurance 32 36
Other operational income 34 18
--------- ---------
Operating profit on continuing operations 601 552
Profit on discontinuing operations (Gresham) 7 5
--------- --------
Operating profit 608 557
Variation from longer term investment return 32 56
Change in equalisation provision (7) (7)
Change in shareholder retained capital (SRC) 13 (137)
--------- --------
Profit before tax 646 469
--------- --------
Diluted earnings per share 6.61p 6.00p
(Based on operating profit after tax)
Operating profit was £608m (2003: £557m), reflecting improved results in almost
all business areas.
The UK life and pensions operating profit before tax for the full year was £391m
(2003: £369m), as the impact of lower levels of with-profits bonuses was more
than offset by an increased transfer from the growing book of non profit
business. The transfer from non profit business of £324m (2003: £295m) comprised
two elements; firstly, a smoothed investment return on the shareholder net worth
and the embedded value of non profit business and secondly, the distribution in
respect of the intra-group subordinated debt capital attributed to the SRC. The
latter item was broadly unchanged at £37m (2003: £36m). 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 £75m
(2003: £74m) as all businesses increased profits in local currency terms.
Legal & General Investment Management saw strong growth in statutory profits.
These increased by 25% to £69m (2003: £55m) reflecting a combination of higher
volumes, higher equity market levels and tightly controlled costs.
The change in SRC within the UK non profit fund was a pre tax contribution of
£13m (2003: a reduction of £137m). This comprised three elements:
- the investment return of £209m (2003: £321m)
- the net capital released of £128m (2003: net capital invested of £163m).
Within the net capital released, management estimates that, over the year,
the new business strain was almost matched by capital released. In
addition, the impact of reserving changes for annuitant longevity
announced last July was more than offset by a combination of favourable
investment variances, a release from our bulk purchase annuity business
arising from better reserving data, a review of reserving margins on
protection business and other smaller changes
- the accrued transfer to shareholders of £324m (2003: £295m).
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 ability to write new non profit business was
supported by both the SRC of £2.2bn and the Society shareholder capital of
£2.0bn.
As at 31 December 2004, the Form 9 ratio for Legal & General Assurance Society,
broadly equivalent to Peak 1, was 15.5% (31 December 2003: 13.0%). This includes
an implicit item of £755m (31 December 2003: £1,000m). Excluding the implicit
item, the ratio was 13.7% (31 December 2003: 10.4%).
We are still in the process of finalising work on the realistic with-profits
balance sheet at 31 December 2004. However, management estimates that the value
of the assets supporting the UK with-profits business would have exceeded
realistic liabilities by an amount in the order of £900m. Although we do not
have a firm estimate of the Risk Capital Margin (RCM) at this stage on the more
rigorous basis now required by the Financial Services Authority, we anticipate
that the RCM will be comfortably covered by this excess.
Changes to UK life fund taxation
================================
At the time of the Chancellor's pre-Budget report in December 2004, the
Government published further proposals for changes to the taxation of life
assurance business, effective from 2005. There were two principal measures. The
first would increase the tax payable on the profits from writing, predominantly,
non profit pension business. The second would increase the tax chargeable on the
investment return on 'surplus' assets supporting with-profits business. On 3
December 2004, Legal & General announced that the first measure would give rise
to a one-off reduction in the reported embedded value of Legal & General
Assurance Society's UK long term fund not exceeding £300m. A reduction of this
order would also reduce the net of tax transfer from the UK long term fund on a
Modified Statutory Solvency basis by up to £20m.
Subsequently, the industry has secured considerably more time for consultation
on these measures and constructive consultation is still in progress. The
changes will require the enactment of a Finance Bill. In view of this, the 2004
results do not incorporate any impact from these proposals.
Expanding UK distribution
=========================
During 2004 we continued to build our business sourced from Independent
Financial Advisers (IFAs) and at the same time we have been positioning
ourselves for the introduction of depolarisation. Quality products and increased
focus on the IFA market have enabled us to grow business from this channel by
32%. Prospects continue to be strong, particularly following our announcement
last year of an important link with Cofunds, the IFA funds platform. In
addition, we have been appointed to the protection panels of Bankhall, Tenet and
Sesame and, in January this year, THINC Destini announced that we had been
appointed to their multi-tie panel.
Bradford & Bingley announced in November 2004 that it would tie to Legal &
General for protection and investment products, an agreement which came into
effect in January 2005. The introduction of the regulation of mortgage advice
provided an opportunity, through Legal & General Partnership Services Ltd, to
further develop our market leading mortgage related distribution by establishing
a network of tied mortgage advisers.
Consistent application of our business model resulted in an estimated increase
in retail market share (including unit trusts and ISAs) to 9.5% (2003: 8.6%).
Outlook
=======
We believe consumer confidence in savings markets has grown steadily through
2004 in the UK and in the overseas markets in which we operate. This is
supported by both the growth in equity values and the momentum in our UK
individual new business performance, with each quarter exceeding the prior year.
Our expectation is that we will maintain momentum in the UK during 2005 despite
the possible impact of any rise in mortgage rates on products relating to the
housing market. The prospects for growth in other product areas, in particular
in individual pensions and medium term savings products, remain encouraging
driven by increasing consumer demand, further product development and enhanced
distribution capabilities. Trading in the early weeks of 2005 showed continued
progress in unit linked bonds, good increases in annual and single premium
individual pension sales and further progress in Group business including bulk
annuities.
All this supports our confidence that Legal & General will continue to build its
market share profitably.
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:
1. The statements in Part 2 of this release have been prepared in all material
aspects 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. This methodology sets out a more
realistic method for recognising shareholders' profits from long term
business than the MSS basis contained in Part 3. The Group's supplementary
financial statements on an Achieved Profits basis have been audited by
PricewaterhouseCoopers LLP and prepared in conjunction with our consulting
actuaries - Tillinghast Towers-Perrin and, in the USA, Milliman USA.
2. The annual report will be sent to shareholders on 22 March 2005 and delivered
to the Registrar of Companies after the Annual General Meeting on 27 April
2005.
3. Issued share capital at 31 December 2004: 6,505,959,483 shares of 2.5p each.
4. A copy of this announcement can be found in the News and Results section of
our Shareholder web site at http://investor.legalandgeneral.com/releases.cfm
5. A presentation of the results will be made to analysts and fund managers at
Temple Court, 11 Queen Victoria Street, London EC4N 4TP at 9.30 today. A
webcast of the presentation to analysts and fund managers will be available
later today at http://investor.legalandgeneral.com/presentations.cfm
6. There will be a conference call for investors chaired by Andrew Palmer, Group
Director (Finance) at 15.00 UK time. Please access the conference call by
dialling +44 (0)20 7365 1844. Investors in the USA may call 1 866 850 2201.
7. A recording of this call will be available for one week at +44 (0)20 7784
1024 (in the USA call 1 866 239 0765). The replay pass code number is
4679889.
8. Financial Calendar:
Ex dividend date for 2004 final dividend 30 March 2005
Record date for 2004 final dividend 1 April 2005
AGM and first quarter new business 27 April 2005
Payment date for 2004 final dividend 3 May 2005
IFRS restatement of 2004 results and EV update 26 May 2005
Interim results / second quarter new business 28 July 2005
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
This information is provided by RNS
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