17th Mar 2006 07:02
Legal & General Group PLC17 March 2006 Legal & General Group Plc Results for the year ended 31 December 2005 Stock Exchange Release - Part 117 March 2006 Record results: Strong outlook • Operating profit (EEV basis) up 43% to £1,092m • Improved non profit new business margins • Operating profit (IFRS basis) up 5% to £647m • Investment management profits up 41% • 17% growth in shareholder retained capital to £2,560m • 5.2% increase in final dividend Group Chief Executive, Tim Breedon, said: "2005 was another record year for Legal & General - record new business andrecord profits. We outperformed the UK market in terms of new business growthand, at the same time, we have improved margins across the board on non profitbusiness. Our purpose is to secure the best returns for our customers and ourshareholders. In 2005, many of our customers have benefited from very stronginvestment returns. Today, reflecting our strong operational performance andpositive outlook, we're also recommending a 5.2% increase in our final dividend. Legal & General operates predominantly in the UK. It's a large market, agrowing market and, as our results show, for us it's a good market. Our key strength lies in the flexibility of our business model and our abilityto embrace change. I am convinced that our business has strong foundations andvery real opportunities for growth. But there is no room for complacency. We will continually reappraise ourbusiness and the markets in which we operate to maximise shareholder value. Sowhat we do well, we will do ever better and, in the process, improve thetransparency of the value we create. We have the ability to continueoutperforming the market in growth and in margin. I am convinced that we willdo so." Financial highlights EEV basis IFRS basis 2005 Change 2005 ChangeOperating profit £1,092m 43% £647m 5%Profit from continuing operations before tax £2,051m 65% £1,383m 104%Life and pensions new business (PVNBP) £7,494m 24% N/A N/AContribution from new life and pensions business £331m 20% N/A N/AFinal dividend per share 3.63p 5.2% 3.63p 5.2%Total dividend per share 5.28p 4.3% 5.28p 4.3%Shareholder net worth/retained capital £1,762m 13% £2,560m 17%Ordinary shareholders' equity £6,970m 13% £4,257m 16%Net asset value per share 107p 65p Overview of results In 2005, total operating profit on a European Embedded Value (EEV) basis grew by43% to £1,092m. Within the UK, life and pensions profit grew 69% to £801m, withstrong growth in new business volumes and increased margins in key productareas. The profits from our in-force business increased substantially,reflecting our growing book of business and favourable operational experience.The 2004 result was affected by additional reserving primarily for annuitantlongevity. On an International Financial Reporting Standards (IFRS) basis, shareholderretained capital grew to £2,560m, an increase of 17%. The release of profit andcapital from non profit business exceeded the level of new business strain. Wewere able to make further reserve releases on our bulk purchase annuity book andbenefited from strong investment returns. Operating profit from international life and pensions business on an EEV basiswas lower at £100m (2004: £113m), as improved results from Europe were more thanoffset by weaker results in the USA. Our US operation has had a difficult yearin which it experienced both increased competition for new business and levelsof mortality claims in excess of assumptions. However, in Europe we have had avintage year, with excellent growth in sales and positive variances on ourin-force business. Our investment management business delivered record new institutional businessof £17bn in 2005 and a significant increase in operating profit, rising 41% to£103m on an IFRS basis. The business benefited from growing scale, improvedmargins, better than assumed persistency for managed pensions fund business andan enviable cost to income ratio of 36%. In general insurance, our scale has been reduced by the profitable sale of theGresham business to Barclays. Operating profit from the continuing business waslower at £14m (2004: £32m). On the household account operating profit fell, dueto higher bad weather claims in the first half and increased competition in thebroker distribution channel in the second half. We are taking steps to ensurethat the household insurance business can benefit further from our presence inthe wider mortgage related markets. Dividend The Board has recommended a final dividend of 3.63 pence per share, an increaseof 5.2%, bringing the total dividend for the year to 5.28 pence, an increase of4.3%. While each dividend decision is clearly made by the Board in the light ofprevailing market conditions, our capital and cash flow projections indicatethat the growth rate in the final dividend is sustainable. Distribution 2005 saw Legal & General invest in the development of a fund platform which willtransform the way in which our customers can buy retail savings products. Indoing so, we are able to take full advantage of not just the IFA market, butalso our bank and building society relationships to provide fund choice to amuch wider customer base. The introduction of our on-platform portfolio bond toBradford & Bingley Group customers in 2005 has been followed by the launch ofportfolio bonds to the IFA market early in 2006. In April we will also add ourmulti-manager pension product to the platform. The breadth and flexibility of Legal & General's distribution capabilitiesunderpin our new business success. Yesterday we announced another significantnew partnership, with Connells - one of the UK's largest estate agency chains.In the IFA market we have grown from seventh largest provider less than threeyears ago to the third largest today. We also see further scope to expand ourdistribution through banks and building societies. Outlook In 2005 we retained our leading share of the protection market. The increase inthe level of housing transactions seen at the end of 2005 is now leading to arecovery in protection volumes. Pensions A-Day has been, and will remain, a significant positive influence onvolumes of pensions transfer business and on restructuring of employer-relatedschemes. The reforms have created a much simpler tax regime for those peoplecommitted to saving for a secure future. There was much that we could support in the recent proposals from the PensionsCommission to encourage a higher level of saving among people on more modestincomes. The Government's response to the Commission is expected in a WhitePaper to be issued in the Spring. Recent retail product innovation also includes our newly launched property trustfor retail savers and we will shortly launch further products for inheritanceplanning, a guaranteed equity bond and new annuity products. The market for bulk purchase annuities is expected to grow considerably over thenext few years. Legal & General has already established a strong position inthis area, not just because of its financial strength, but because it possesseskey skills and systems in pricing, underwriting and administration. In recentmonths, there has been press comment on possible new entrants into this market.While there is scope for substantial additional capacity in the market, theoperational and reputational barriers to entry are significant. In overseas markets, we expect further opportunities for our European businessesand a recovery in the level of new applications in the USA after a difficultyear in 2005. Our investment management business has made a good start to 2006 and we willcontinue to press ahead with initiatives to broaden further our product rangeand the geographic spread of the business. There is growing confidence among consumers in those areas of financial servicesin which we excel. This confidence is driven by improving equity markets andgrowing levels of activity in the housing market. The UK remains a good marketin which to operate and this is clearly demonstrated by new business trends inthe early part of 2006. 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: • Issued share capital at 31 December 2005 was 6,507,421,932 shares of 2.5p each. • 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 • A presentation to analysts and fund managers will take place at 09.30 GMT today at Temple Court, 11 Queen Victoria Street, London EC4N 4TP. • There will be a live listen only teleconference link to the presentation. UK investors should dial 0845 245 3471 and overseas investors should dial +44 (0)1452 542 300. • The presentation slides will be available from 09.20 GMT at http://investor.legalandgeneral.com/results.cfm • An audio-cast of the presentation will be available later today at http://investor.legalandgeneral.com/presentations.cfm The European Union requires all listed companies to prepare their consolidatedfinancial statements using standards issued by the International AccountingStandards Board with effect from 1 January 2005. The Group's statutory resultshave therefore been reported on an International Financial Reporting Standardsbasis rather than the previous Modified Statutory Solvency basis and prior yearcomparatives have been restated accordingly. The Group's directors continue tobelieve that the supplementary accounts prepared using European Embedded Valueprinciples provide the most accurate and meaningful reflection of the Group'slong term operations and their value to shareholders. The following financial statements were approved by a sub-committee of the Boardon 16 March 2006 and constitute non statutory accounts within the meaning ofSection 240 of the Companies Act 1985. The Group's financial statements for2005 include the auditors' unqualified report and do not contain a statementunder either Sections 237(2) or 237(3) of the Companies Act 1985. Financial Calendar 2006: Ex-dividend date for 2005 final dividend 19 AprilRecord date for 2005 final dividend 21 AprilFirst quarter new business results 26 AprilAnnual General Meeting 18 MayPayment of 2005 final dividend 22 MayInterim results and second quarter new business 27 JulyEx-dividend date for interim dividend 6 SeptemberRecord date for interim dividend 8 SeptemberPayment date for interim dividend 2 OctoberThird quarter new business results 18 October A Dividend Re-investment Plan is available to shareholders. Forward-looking statements: This document may contain certain forward-looking statements with respect tocertain of Legal & General Group Plc's plans and its current goals andexpectations relating to future financial condition, performance and results.By their nature forward-looking statements involve risk and uncertainty becausethey relate to future events and circumstances which are beyond Legal & GeneralGroup's control, including, among others, UK domestic and global economic andbusiness conditions, market related risks such as fluctuations in interest ratesand exchange rates, the policies and actions of regulatory authorities, theimpact of competition and the policies and actions of governmental andregulatory authorities, the timing impact and other uncertainties of futureacquisition or combinations within relevant industries. As a result, Legal &General Group's actual future condition, performance and results may differmaterially from the plans, goals and expectations set out in Legal & GeneralGroup's forward-looking statements. Legal & General Group Plc does notundertake to update forward-looking statements contained in this document or anyother forward-looking statement it may make. Table of contents PageBusiness review 7New business 13European Embedded Value - Consolidated income statement 17 - Consolidated balance sheet 18 - Profit from continuing operations after tax from covered business 19 - Analysis of experience variances 20 - Analysis of operating assumption changes 21 - Variation from longer term investment return 21 - Time value of options and guarantees 21 - Investment management income statement 22 - Analysis of tax 22 - Earnings per share 23 - Embedded value reconciliation 24 - Analysis of ordinary shareholders' equity 26 - Sensitivities 28 - Assumptions 29International Financial Reporting Standards - Operating profit income statement 33 - Consolidated income statement 34 - Consolidated balance sheet 35 - Consolidated cashflow statement 37 - Shareholder retained capital movement 40 - Analysis of tax 40 - Earnings per share 42 - Analysis of gross written premiums 43 - Segmental analysis 44 - Segmental analysis of ordinary shareholders' equity 46 - Borrowings 47 - Insurance contract liabilities 48 - Investment contract liabilities 50 - Non-linked asset mix and investment return 50 - Sensitivities 51 - Contingent liabilities 51Capital and cashflow 53Appendices 57 Business Review Consolidated Income Statement £m EEV IFRS 2005 2004 2005 2004 Restated RestatedFrom continuing operations:- Life and pensions 901 587 489 477- Investment management 136 108 103 73- General insurance 14 32 14 32- Other operational income 41 35 41 35Total operating profit 1,092 762 647 617Variation from longer term investment return 870 414 139 48Effect of economic assumption changes 8 34 N/A N/AShareholder retained capital movement N/A N/A 516 (20)Property income attributable to minority interests 81 32 81 32Profit from continuing operations before tax 2,051 1,242 1,383 677Tax (563) (354) (371) (187)Effect of UK tax changes (276) - N/A N/AProfit from continuing operations after tax 1,212 888 1,012 490Profit from discontinued operations 13 5 13 5Profit from ordinary activities after tax 1,225 893 1,025 495Profit attributable to minority interests (81) (32) (81) (32)Profit attributable to equity holders of the company 1,144 861 944 463 Restatement of 2004 comparatives The 2004 comparatives have been restated for the following items: 1.After the 2004 Full Year Results were restated under International FinancialReporting Standards, the interpretation of provisions within IAS 32, "FinancialInstruments: Disclosure and Presentation", has required the £400m 5.875% undatedsubordinated notes to be classified as equity, rather than as a liability. Thechange in classification has resulted in an increase in reported profit aftertax for 2004 of £12m, due to the corresponding reclassification of interestpayments as distributions and an increase in total equity of £398m. 2.The adjustment of £49m to transfer Gresham discontinued expenses from otherexpenses to acquisition costs. 3.The Netherlands operating profit is affected by various mismatches betweenasset and liability valuations. An adjustment to partially smooth theinvestment return fluctuations has been made to the Netherlands operatingprofit. This reduces the 2004 operating profit by £11m and increases thevariation from longer term investment return by the same amount. 4.The results of Retail investments and Institutional fund management have beencombined to create a new segment called Investment management. The Retailinvestments operating profit of £4m in 2004 has been reclassified from Otheroperational income and included in Investment management. 5.There has been no impact on the financial statements of the Group's earlyadoption of the amendment to IAS 39 on the use of the fair value option. Life and pensions - EEV basis £m UK International Total 2005 2004 2005 2004 2005 2004Present value of new business premiums 6,621 5,255 873 802 7,494 6,057Margin on new business 4.6% 4.6% 2.9% 4.4% 4.4% 4.6%Contribution from new business 306 241 25 35 331 276(after cost of capital)Contribution from in-force business- Expected return 294 273 62 49 356 322- Experience variances 89 46 0 17 89 63- Operating assumption changes (14) (221) (5) 1 (19) (220)Development costs (20) - - - (20) -Contribution from shareholder net worth 146 135 18 11 164 146Operating profit 801 474 100 113 901 587 UK life and pensions The strength and flexibility of our business model has enabled us to grow bothnew business volumes and market share. The 26% growth in the present value ofnew business premiums was matched by a 27% growth in new business contributionto £306m. In each product area of non profit business, margins increased.However, reflecting the changed sales mix, the margin on UK new business(expressed as the contribution from new business divided by the present value ofnew business premiums) was unchanged at 4.6%. The return on capital from newnon profit business was 19% gross and 15% net of the cost of solvency capital(2004: 17% and 14% respectively). The increase in the expected contribution from in-force business and thecontribution from shareholder net worth reflect the unwinding at a slightlylower opening discount rate (7.5% against 7.7%) on higher opening values. There was a net positive impact from experience variances and operatingassumption changes. The experience variance benefited from positive persistencyexperience in protection business, which was partly offset by negativeexperience on mortgage endowments and with-profits bonds. There was a positiveexperience variance from mortality and morbidity and a small negative varianceon expenses. Experience variances also continued to benefit from furtherreleases of margins for prudence arising from improved data management in thetransfer of deferred annuity liabilities. Further analysis is provided in notes3.4 and 3.5 in the EEV section of these results. In 2004, operating assumption changes included the impact of adopting revisedannuitant mortality assumptions. For 2005, operating assumption changes includethe impact of strengthening the provision for mortgage endowment mis-selling andplanned expenditure on pensions simplification. In 2005, there was no netimpact from mortality. The development costs for 2005 primarily relate to the development of theCofunds platform. International life and pensions Operating profit from international life and pensions business was lower at£100m (2004: £113m) as improved results from Europe were more than offset byweaker results in the USA. In the Netherlands operating profit was significantly higher at £43m (2004:£30m) and in France profits trebled to reach £33m. The combined contributionfrom new business grew by more than a third, driven largely by improved marginsand increased volumes in France. Positive experience variances and assumptionschanges reflected improvements in our modeling capability in the Netherlands anda reduction in required capital in France. In the USA, the level of claims exceeded the assumed level in the first threequarters of the year and future mortality assumptions have been adjustedaccordingly. The contribution from new business for 2005 reflectedsignificantly lower volumes. It has also been calculated assuming no externalfinancing for Triple X reserves on 2005 new business. A securitisationtransaction to finance such reserves on 2003 and 2004 new business wasimplemented successfully in the final quarter of 2004. We anticipate thatfurther financing will be arranged in 2006. Life and pensions - IFRS basis £m 2005 2004UK operating profit:With-profits business 66 67Distribution from non profit business 312 287Subordinated debt interest 37 37 415 391USA 52 58Netherlands 18 28France 4 0Operating profit 489 477 UK life and pensions Strong returns on the assets backing with-profits liabilities enabledpolicyholders' bonus rates to be either maintained or increased in 2005.Although bonus rates generally improved, there was a marginally lower profitcontribution from with-profits business. Against this backdrop of stronginvestment markets, the Group has now decided to follow the general practice oftime-barring future complaints from mortgage endowment customers. The increased distribution in respect of non profit business has been calculatedby reference to the formula agreed with our regulators and is limited to asmoothed investment return of 7% on the embedded value of the shareholderretained capital (SRC) and sub-fund and 5% of the embedded value of non profitbusiness. That transfer is augmented by the interest in respect of theintra-group subordinated debt capital attributed to the SRC amounting to £37m.The external servicing cost of the related debt has been reflected in interestexpense reported within other operational income. Overall, the UK life andpensions operating profit before tax grew 6% to £415m (2004: £391m). International life and pensions The operating profit from our international life and pensions businesses was£74m (2004: £86m). The reduced profit from the USA reflects both adversemortality experience and the adverse impact of lower sales on costs. Thecontribution from the Netherlands reduced as, under IFRS, all assets but not allliabilities are valued at fair value. As a result of this, further volatilityin results can be expected. In France, we benefited from improved margins on ahigher level of sales. Investment management - IFRS basis £m 2005 2004Institutional new business 17,134 15,547Profits: RestatedManaged pension funds 74 51Ventures 4 4Property 4 3Retail investments 7 4Other external income 5 3Other operational income 9 8Operating profit 103 73Cost/income ratio 36% 41% The profit from our investment management business grew by 41% benefiting fromfurther market growth, strong net inflows and increasing economies of scale.The operating profit of £103m includes £7m for retail investments (2004: £4m)previously reported within other operational income. In a record year for new business, more than half of new funds have come fromexisting clients. We continue to expand our product range and the geographicspread of our business. The second half of 2005 saw the launch of both pooledand segregated liability driven investment products. Our strengths in definedcontribution pension business were recognised at the 2005 Professional PensionsAwards where we won the DC Pension Provider of the Year award. Continued focushas led to a further improvement in the cost to income ratio. Funds under management by Legal & General Investment Management grew to £204bn(31 December 2004: £162bn) of which £145bn was managed for external clients.The further broadening of our services and our core competencies in indextracking and active bond management have ensured that we have retained ourposition as the leading manager of UK pension fund assets. These comments have focussed on the IFRS results since, increasingly, analystsare valuing this business on the basis of IFRS earnings. As in previousperiods, our supplementary reporting also includes details of the results on anEEV basis which can be found in notes 3.2 and 3.8 of the EEV section of theseresults. These results reflect growth in new business volumes and improvedmargins on that business, the further growth in assets under management, betterthan assumed persistency and increased operational efficiency. General insurance - IFRS basis 2005 2004£m Operating Underwriting Operating Underwriting profit result profit resultHousehold 7 (6) 22 10Other 7 1 10 5Operating profit 14 (5) 32 15 Gross written premiums from continuing operations grew by 3% to £334m asimproved volumes in household and healthcare business lines were partly offsetby lower motor volumes. The operating profit from continuing operations was significantly lower. Thisprimarily reflected a reduced operating profit from the household accountarising from higher bad weather claims in the first half and increasedcompetition in the broker distribution channel in the second half of 2005.Elsewhere, improved results from accident, sickness and unemployment businesswere offset by increased motor losses and a smaller release of reserves from themortgage indemnity book. The combined operating ratio was 101% (2004: 94%). The previously announced sale of our 90% stake in Gresham Insurance Company Ltdto Barclays Bank PLC gave rise to a profit from discontinued operations of £13mafter tax. Other operational income - IFRS basis 2005 2004£m RestatedShareholders' other income:Investment return on shareholders' equity 127 109Interest expense (75) (57) 52 52Other operations (5) (4)Unallocated corporate and development expenses (6) (13) 41 35 Other operational income comprises the longer term investment return arisingfrom investments held outside the UK long term fund, interest expense, theresults of the Group's other operations and unallocated corporate expenses.Improved investment returns were offset by higher interest expense arising fromincreased levels of debt. The increase in the contribution to £41m reflects alower level of unallocated corporate and development expenses. Profit attributable to equity holders £m EEV IFRS 2005 2004 2005 2004 Restated RestatedOperating profit 1,092 762 647 617Variation from longer term investment return 870 414 139 48Effect of economic assumption changes 8 34 N/A N/AShareholder retained capital movement N/A N/A 516 (20)Property income attributable to minority interests 81 32 81 32Profit from continuing operations 2,051 1,242 1,383 677Tax (563) (354) (371) (187)Effect of UK tax changes (276) - N/A N/AProfit from continuing operations after tax 1,212 888 1,012 490Profit from discontinued operations 13 5 13 5Profit on ordinary activities after tax 1,225 893 1,025 495Profit attributable to minority interests (81) (32) (81) (32)Profit attributable to equity holders of the company 1,144 861 944 463 EEV basis The Group's operating profit before tax grew by 43% to a record £1,092m. Theprofit from continuing operations before tax, which includes the effect ofvariances in investment return from the longer term return assumed at the end of2004, benefited from strong investment markets and rose by 65% to £2,051m. Theinvestment return on the equity and property portfolio of the UK long term fundwas 15.8% above the assumption for the period (2004: 6.8% above assumption). IFRS basis In aggregate, shareholder retained capital (SRC) increased by £516m pre-tax(2004: a reduction of £20m). This reflected the impact of improved investmentreturns and the significant increase in the net capital released from thegrowing book of non profit business, offset partly by the increased transfer toshareholders from non profit business. On a net of tax basis, the new businessstrain on higher volumes of non profit business of £466m was more than offset bythe expected release of capital of £499m from the existing book of business andother reserve adjustments. Further analysis is provided in note 5.3 in theCapital and Cashflow section of these results. Tax The EEV result includes a one-off reduction of £276m in the embedded value ofthe UK long term fund. This is presented as a charge from the effect of UK taxchanges. The Finance (No 2) Act 2005 included provisions which increase the taxpayable by the non profit part of the fund from 2005 onwards. Capital and financing Legal & General remains one of the strongest companies in its sector. Ourcapital position underpins our ability to continue to grow new business volumesprofitably. The Group is required to measure and monitor its capital resources on aregulatory as well as an IFRS basis and to comply with the minimum capitalrequirements of regulators in each territory in which it operates. In general,the regulators require more prudent assumptions than IFRS. Legal & General'stotal capital resources are substantially in excess of both total regulatorycapital and the minimum regulatory capital it is required to hold. At Group level, the Insurance Groups Directive capital surplus was £2.4bn inexcess of the required capital of £4.4bn. The total capital resources available to Legal & General Assurance SocietyLimited, the Group's main UK operating subsidiary, amounted to £8.5bn at 31December 2005 (£7.0bn at 31 December 2004), which included an implicit item of£540m (2004: £755m) in respect of non profit business, and exceeded the totalcapital requirement by £4.4bn (£4.0bn at 31 December 2004). As at 31 December 2005, the value of the assets supporting the UK with-profitsbusiness was estimated to have exceeded realistic liabilities by £842m (31December 2004: £864m). The required Risk Capital Margin (RCM) for thewith-profits part of the fund, calculated by reassessing realistic assets andliabilities in financially stressed conditions, was £327m at 31 December 2005(31 December 2004: £643m). The RCM has fallen significantly as a result ofmanagement actions taken during 2005 to reduce the with-profits part of thefund's exposure to financial risks. These actions include establishing afacility to make a charge for guarantees and undertaking improved asset matchingby product and duration. In June 2005 we issued €600m of 4% dated subordinated notes qualifying as lowertier 2 capital for regulatory purposes. The proceeds were swapped into sterlingand will be used to repay part of our senior convertible bond which matures atthe end of 2006, if not converted before then. In addition, in December 2005,we put in place a £1bn 5 year syndicated revolving credit facility. During2005, the IFRS classification of the £400m undated subordinated notes (uppertier 2 regulatory capital), which we raised in March 2004, was changed from debtto equity. We have amended the terms of the notes since the year end so thatthey will revert to debt classification in the 2006 results. The Group has also reviewed the arrangements for financing the capital requiredto write new individual protection business in the UK. Previously, much of thiscapital requirement had been financed through quota share reinsurance treatiesunder which a high proportion of the premium was paid to the reinsurer whichalso paid the same proportion of the claim. In return the reinsurer met a largepart of the initial capital requirement. Following its review of thesearrangements, the Group has put in place revised reinsurance treaties whichseparate mortality risk from financing. The revised arrangements have no impacton the IFRS results and, in 2005, have a marginally positive impact on the EEVresults. In 2006, we expect to benefit from greater flexibility in ourreinsurance programmes. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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