24th Feb 2005 07:01
Legal & General Group PLC24 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 significantlygrown our market share, reflecting the quality of our products, widedistribution, our efficient business model and our strong brand. Ourinvestment management business has built further on its outstanding track recordwith impressive growth in funds under management and in profits. During 2004,customers placed over £22 billion with Legal & General, a powerful demonstrationof the confidence placed in our brand. "We have maintained pricing discipline and have produced increased profits whilesignificantly strengthening annuity reserves at the interims. Legal & General'sfinancial strength, spread of profitable businesses and operating performanceenabled us to maintain our policy of growing dividends and to continue investingin growth. "Looking ahead, we expect to benefit from improving market conditions and, inthe 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 theAssociation of British Insurers in December 2001. Full details of the resultscan be found in Parts 2 Achieved Profits (AP), 3 Modified Statutory Solvencybasis (MSS) and 4 Legal & General Investment Management. Overview of results=================== Legal & General's UK strategy continues to be focused on providing a broad rangeof competitive products through multi-channel distribution with good customerservice. The consistent application of our business model has enabled us tobuild sustainable business relationships and has brought about significantmarket 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 £mProfit on continuing operations:UK life and pensions 494 537International life and pensions 119 83Institutional fund management 103 82General insurance 32 36Other operational income 34 18 --------- ---------Operating profit on continuing operations 782 756Profit on discontinuing operations (Gresham) 7 5 --------- ---------Operating profit 789 761Variation from longer term investment return 408 422Change 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 businessbefore tax was a little higher at £272m (2003: £271m). This total reflectssignificant contributions from a broader range of products. Pricing disciplinewas maintained with the return on capital from non profit new business for thefull year being maintained at the first half level of 18%. However, the totalcontribution from new business as a percentage of APE was 38% (2003: 46%)reflecting a different mix of business and the strengthening of annuitantmortality bases. The contribution from in-force business was £91m (2003: £117m). This reflectedpositive experience variances, primarily from bulk purchase annuity business andprotection business. There was an adverse impact from operating assumptionchanges, where the previously announced strengthening of annuitant mortalityassumptions and a provision for possible claims for redress on mortgageendowment business beyond September 2005 were only partly offset by improvedfuture 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% inlocal currency terms. Operating profit was £73m (2003: £50m) with increasedcontributions 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 wasput in place to finance new business written in 2004 and some older business.For in-force business, securitisation also had a positive effect on experiencevariances. After unfavourable mortality experience in the first quarter, claimswere in line with assumptions over the rest of the year. New business volumes in Europe were resilient and, including retail investmentbusiness, grew 27% to £56m APE (2003: £44m). The operating profit was £32m inthe Netherlands (2003: £24m) and £14m in France (2003: £9m). The combinedcontribution from new business was £21m (2003: £15m). Legal & General Investment Management-------------------------------------Legal & General Investment Management maintained its highly successful trackrecord, winning new funds of £15.5bn (2003: £13.1bn), with particularly strongperformance in the first quarter. Within this there was a significant increasein 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 formanaged pension funds. The contribution from new managed pension funds businesswas £36m (2003: £31m) reflecting the sizeable increase in new business volumes.The contribution from in-force business benefited from better than assumedpersistency and growing economies of scale. The additional elements of thebusiness, 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 & GeneralInvestment 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 thehousehold account reflected a significantly lower level of subsidence claimsoffset in part by higher bad weather claims. The benefit of improved profitsfrom the household account was more than offset by a smaller release of reservesfrom the mature mortgage indemnity book as well as a deterioration in theperformance 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 BarclaysBank PLC, which already owns the remaining 10%, for a consideration of £85m. The2004 results for Gresham Insurance have been shown as discontinuing operationswith net written premiums of £137m (2003: £134m) and a pre-tax operating profitof £7m (2003: £5m). The sale, subject to FSA approval, is expected to completeby 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 arisingfrom 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 returnwas only partly offset by higher interest costs. The retail investment businessproduced a profit of £4m (2003: a loss of £15m) reflecting the growingcontribution from existing business, pricing discipline and a lower level of newbusiness strain. The result for other operations includes the set up costs forLegal & General Partnership Services Ltd, our host company for mortgageregulation. The increase in unallocated corporate and development expensesreflects the costs associated with implementing new accounting and capitaladequacy 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 includesthe effect of variances in investment return from the longer term return assumedat the end of 2003, was £1,222m (2003: £1,117m). The investment return on theequity and property portfolio of the UK long term fund was 6.9% above theassumption 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 Profitsbasis 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 £mProfit on continuing operations:Life and pensions operating profit 466 443Institutional fund management 69 55General insurance 32 36Other operational income 34 18 --------- ---------Operating profit on continuing operations 601 552Profit on discontinuing operations (Gresham) 7 5 --------- --------Operating profit 608 557Variation from longer term investment return 32 56Change 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 almostall 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 morethan offset by an increased transfer from the growing book of non profitbusiness. The transfer from non profit business of £324m (2003: £295m) comprisedtwo elements; firstly, a smoothed investment return on the shareholder net worthand the embedded value of non profit business and secondly, the distribution inrespect of the intra-group subordinated debt capital attributed to the SRC. Thelatter item was broadly unchanged at £37m (2003: £36m). The external servicingcost of the related debt has been reflected in interest expense reported withinother 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 highervolumes, 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 isused in each product area. Our ability to write new non profit business wassupported 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 includesan implicit item of £755m (31 December 2003: £1,000m). Excluding the implicititem, the ratio was 13.7% (31 December 2003: 10.4%). We are still in the process of finalising work on the realistic with-profitsbalance sheet at 31 December 2004. However, management estimates that the valueof the assets supporting the UK with-profits business would have exceededrealistic liabilities by an amount in the order of £900m. Although we do nothave a firm estimate of the Risk Capital Margin (RCM) at this stage on the morerigorous basis now required by the Financial Services Authority, we anticipatethat 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, theGovernment published further proposals for changes to the taxation of lifeassurance business, effective from 2005. There were two principal measures. Thefirst would increase the tax payable on the profits from writing, predominantly,non profit pension business. The second would increase the tax chargeable on theinvestment return on "surplus" assets supporting with-profits business. On 3December 2004, Legal & General announced that the first measure would give riseto a one-off reduction in the reported embedded value of Legal & GeneralAssurance Society's UK long term fund not exceeding £300m. A reduction of thisorder would also reduce the net of tax transfer from the UK long term fund on aModified Statutory Solvency basis by up to £20m. Subsequently, the industry has secured considerably more time for consultationon these measures and constructive consultation is still in progress. Thechanges will require the enactment of a Finance Bill. In view of this, the 2004results do not incorporate any impact from these proposals. Expanding UK distribution========================= During 2004 we continued to build our business sourced from IndependentFinancial Advisers (IFAs) and at the same time we have been positioningourselves for the introduction of depolarisation. Quality products and increasedfocus on the IFA market have enabled us to grow business from this channel by32%. Prospects continue to be strong, particularly following our announcementlast year of an important link with Cofunds, the IFA funds platform. In addition, we have been appointed to the protection panels of Bankhall, Tenet andSesame and, in January this year, THINC Destini announced that we had beenappointed 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 intoeffect in January 2005. The introduction of the regulation of mortgage adviceprovided an opportunity, through Legal & General Partnership Services Ltd, tofurther develop our market leading mortgage related distribution by establishinga network of tied mortgage advisers. Consistent application of our business model resulted in an estimated increasein 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 through2004 in the UK and in the overseas markets in which we operate. This issupported by both the growth in equity values and the momentum in our UKindividual new business performance, with each quarter exceeding the prior year. Our expectation is that we will maintain momentum in the UK during 2005 despitethe possible impact of any rise in mortgage rates on products relating to thehousing market. The prospects for growth in other product areas, in particularin individual pensions and medium term savings products, remain encouragingdriven by increasing consumer demand, further product development and enhanceddistribution capabilities. Trading in the early weeks of 2005 showed continuedprogress in unit linked bonds, good increases in annual and single premiumindividual pension sales and further progress in Group business including bulkannuities. All this supports our confidence that Legal & General will continue to build itsmarket 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 The company news service from the London Stock ExchangeRelated Shares:
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