26th Jul 2007 07:00
Legal & General Group PLC26 July 2007 Page 1LEGAL & GENERAL GROUP PLC INTERIM RESULTS 2007 Stock Exchange Release26 July 2007 Strong growth=============Capital return==============Dividend increase================= • Worldwide life and pensions PVNBP(1) of £4,979m + 22% • UK life and pensions PVNBP of £4,472m + 24% • Worldwide life and pensions new business contribution of £178m - 7% • £16.2bn new institutional funds under management + 51% • EEV(2) operating profit of £589m + 5% • Interim dividend 1.87p + 7.5% • Capital return announced - share buyback of £1bn Group Chief Executive, Tim Breedon, said:"Legal & General has substantially reshaped both its capital and organisational structures. We are now much closer torealising the business model which we envisage taking us forward over the coming years. "Having taken into account our strategic aim of maintaining a AA financial strength rating and an efficient capitalbase, able to support the long term growth potential of the business, the Board has approved a £1bn capital returnprogramme in the form of an on-market share buyback. "The dividend growth rate is increased to 7.5%, reflecting strong cash flows and the profitability of our business. Itis the aim of the Board to have a sustainable dividend policy, one which aims to build on our history of providing asteady growing stream of income to our investors. "Our financial results for the first half of the year demonstrate further progress in our core protection, savings andinvestment management operations, while our new business figures show the robustness of our distribution model. UKeconomic conditions remain favourable. However, recent interest rate rises appear to have slowed activity in thehousing market. Savings continue to benefit from the twin catalysts of A-Day and platform development. We remainconfident that Legal & General will continue to build on its competitive position, particularly given progress onproduct development, platform technology and extending distribution reach." =========================================================================================================== Notes:1. Present value of new business premiums2. European Embedded Value ======================================================================================================================= Page 2 Financial highlights EEV basis IFRS(1) basis H1 2007 % change on H1 H1 2007 % change on H1 2006 2006-----------------------------------------------------------------------------------------------------------------------Worldwide life and pensions new business (PVNBP) £4,979m 22 N/A N/AWorldwide life and pensions new business (APE)(2) £661m 20 N/A N/AWorldwide new business (APE) £830m (7) N/A N/AContribution from new life and pensions business £178m (7) N/A N/A-----------------------------------------------------------------------------------------------------------------------Operating profit £589m 5 £342m 2Profit from continuing operations before tax £797m 18 £499m 24-----------------------------------------------------------------------------------------------------------------------Interim dividend per share 1.87p 7.5 1.87p 7.5-----------------------------------------------------------------------------------------------------------------------Ordinary shareholders' equity £8,365m 17 £5,515m 30-----------------------------------------------------------------------------------------------------------------------Ordinary shareholders' equity per share 128p 16 84p 29=======================================================================================================================Notes:1. International Financial Reporting Standards2. Annual Premium Equivalent - comprises new annual premiums together with 10% of single premiums Overview of results------------------- Worldwide new life and pensions business grew by 20% on an APE basis to £661m (H1 06: £553m). UK life and pensionsvolumes increased by 21% year on year, with strong growth in pensions, investment bonds and individual annuities. Totalworldwide sales, including retail investments, were £830m APE. This compares with £896m APE in the first half of 2006,which included unusually high volumes of institutional and wholesale transfer business. Legal & General InvestmentManagement (LGIM) attracted a record £16.2bn of new money in the first six months of the year and now has over £250bnof funds under management. On an EEV basis, the Group's operating profit before taxation increased by 5% to £589m (H1 06: £560m). Worldwidecontribution from new life and pensions business reduced to £178m (H1 06: £192m), primarily reflecting the change inmix of new business written in the period. Life and pensions experience variances and operating assumption changes werea positive £58m (H1 06: £43m). This resulted primarily from the move in July to charging fees for investment managementservices provided to Legal & General Assurance Society Limited (Society) by LGIM on a higher market referenced basis,rather than the cost recovery basis used historically. On an IFRS basis, the Group's operating profit increased by 2% to £342m (H1 06: £334m). UK life and pensions operatingprofit grew by 16% to £249m (H1 06: £215m) and there were increased contributions from our overseas life and pensionsbusiness and LGIM. However, these were partly offset by an operating loss of £38m in our general insurance business(H1 06: £2m profit), reflecting weather-related losses in January and June. The final impact of the severe floodingfrom 20 July 2007 has not yet been quantified. However, early indications suggest that it could give rise to claims ofthe order of £30m net of reinsurance in the second half of 2007. Capital return, dividend policy and ongoing investor communication------------------------------------------------------------------ In November 2006, Legal & General committed both to conducting an annual assessment of the capital we hold and tocommunicating our findings at each set of Interim results. We indicated that where capital was identified as clearly inexcess of the requirements of the business, this would be returned to shareholders. Following this year's detailed assessment of our capital position, we have been able to confirm that the Groupcurrently holds £1bn of capital in excess of requirements. This assessment has taken into account the long term growthpotential of the business, our capital requirements and our strategic aim of maintaining a AA financial strengthrating, even following a moderate shock event. Based on this year's findings, the Board has approved a £1bn capital return programme, in the form of an on-marketshare buyback which will begin shortly. We will buy shares using a volume-led approach, based on typical buybackpercentages of the average daily volume of Legal & General shares currently traded. Whilst we are committed toexecuting as quickly as possible, there is the potential that this process will last beyond July 2008. Maintaining our AA financial strength rating continues to be a key constraint on the capital we hold. Legal & Generaldoes not expect the announcement of the capital return programme to have any impact on the current ratings or ratingsoutlook of the Group from the rating agencies, Standard & Poor's and Moody's. ======================================================================================================================= Page 3 We took a number of actions to ensure that sufficient liquid assets and distributable reserves were available inLegal & General Group Plc (Group Plc) at 30 June 2007 to support a return of capital to shareholders. During the firsthalf of 2007, Society repaid internal subordinated debt of £602m and paid an interim dividend of £400m, both to GroupPlc. We sold approximately £180m of equities held by shareholders' funds as part of this process. The Board considered its dividend policy alongside its assessment of capital. It took into account the Group's futurecapital requirements, projections of future profits and dividends from subsidiaries, current investment marketconditions and the aim of maintaining a progressive dividend policy. It concluded that it was appropriate to increasethe 2007 Interim dividend by 7.5% to 1.87p per share. In addition to conducting annual assessments of capital held, Legal & General will update its balanced scorecard ofcapital measures every six months, to assist investors in tracking movements in our capital base against key targetranges. The 2007 Interim results update can be found in the "Capital and financing" section below. Update on capital review------------------------ Also in November 2006, Legal & General set out the timetable for a detailed review of its capital structure. Thestructure we have had in place has supported our strong, profitable growth for more than a decade. However, managementindicated the need to review our structure in light of regulatory and fiscal developments over recent years. Our aimsare to enhance the efficiency and flexibility of capital we hold, to improve the clarity of capital structure, and tosupport the continuing profitable growth of our business. We have detailed our progress during the first half of 2007below: 1. Legal & General Pensions Limited In December 2006, we ceded the non-linked non profit pensions and annuity business of Society to a new, wholly ownedreinsurance company, Legal & General Pensions Limited (LGPL). This was an important first step in the broaderrestructuring of our balance sheet. However, as we anticipated, it gave rise to a capital inefficiency of £0.5bn on aregulatory basis due to the requirement to hold solvency capital in both entities. We disclosed this at the 2006Preliminary results and indicated that we would work to remove the inefficiency. The FSA introduced a framework for a new regulatory insurance entity - an Insurance Special Purpose Vehicle (ISPV) - inDecember 2006. It remains our preference to convert LGPL into an ISPV. This would provide greater structuralflexibility and, we believe, would have the effect of largely reversing the capital inefficiency created byestablishing LGPL. We have lodged an application with the FSA and, together with the ABI, are seeking further clarityon the basis of taxation of this new type of vehicle. We remain keen to effect the conversion to an ISPV in the secondhalf of 2007. 2. Capital structure of Society Legal & General continues to review the long term structure of Society, including the Shareholder Retained Capital andthe Sub-fund. We have appointed an independent expert to ensure that, in any future restructuring, all policyholdersare treated fairly. 3. Internal investment management contracts LGIM has historically charged investment management services to Society on a cost recovery basis. From 1 July 2007, theservice will be provided at higher market referenced fees. We believe this aligns our practice with peers, recognisesthe value of services provided by LGIM and better reflects the generation of profits in the value chain. Investmentmanagement services provided to LGPL have been charged at market referenced fees since its inception. 4. Innovative tier I issue In May 2007, Legal & General issued £600m of Innovative tier I debt. The proceeds were used in part to repay short termsenior debt and the balance will be used to finance the acquisition of Nationwide Life and Nationwide Unit TrustManagers. This issue increased our Group regulatory capital surplus. It also counts as equity in the capital models ofthe rating agencies, Standard & Poor's (100%) and Moody's (75%), further supporting our AA+/Aa1 financial strengthratings. ======================================================================================================================= Page 4 Distribution and product developments------------------------------------- As previously disclosed, we secured new distribution partnerships with Nationwide Building Society and IntelligentFinance in the first half of this year. We now expect our relationship with Nationwide to go live in early 2008,slightly later than the timing originally announced, following the completion of the planned merger of NationwideBuilding Society with Portman Building Society later this year. We continue to develop new products and improve existing ones. We were pleased with the launch of our open-architectureGroup SIPP product to the corporate pensions market and we have delivered enhancements to our Group Income Protection,Critical Illness Cover and high net worth protection products, among many others, in the first half of the year. Weexpect to launch an International bond product from our new Dublin subsidiary in the second half of 2007. The bond isaimed at the high net worth segment, will give Legal & General access to the £7bn International bond market in the UKand will further enhance our suite of open architecture products. Outlook------- Our core savings market has continued to benefit from the ongoing impact of A-Day and the increasing utilisation ofplatforms. Customers remain attracted to our leading products and services, supported by the strengths of LGIM. Currentinvestment conditions have the potential to lead to some increase in market volatility. However, demographics continueto support the market for long term savings products. Housing market activity has come under pressure recently as the interest rate rises appear to have dampened housingdemand, impacting growth in the mortgage protection market. The protection market will also reflect the absence ofpension term assurance, which contributed to sales growth in the second half of 2006. We are confident that we cancontinue to improve our market position despite these more challenging conditions - the impact of our new relationshipswith Nationwide Building Society, Intelligent Finance and others will, we believe, deliver further market share growthin 2008. We continue to work to deliver innovative bulk purchase annuity solutions, harnessing the skills in both LGIM and ourannuity business. We have seen an encouraging increase in enquiries from open pensions schemes looking at their buy-outoptions and have started to see sales coming through. In addition, we expect to continue to win significant volumes ofboth traditional bulk and individual annuity business from corporates and individuals attracted to our value for moneyproducts and consistently good customer service. We support the broadening of pension provision through the government's personal account initiative. However, we haveexpressed concerns about details of the proposals and their likely impact on the existing private pension market. Weremain actively and constructively engaged with government on issues, including taxpayer subsidy, "levelling down"contribution levels and transfers. We are encouraged by both the approach and direction being taken by the FSA in its Retail Distribution Review. We seeclear benefits in introducing greater clarity at the point of sale between the cost of advice and the cost of productsbut will seek to ensure that any changes avoid unnecessary implementation expense and take account of the need fororderly transition. We believe that our diversified distribution model positions us favourably to capitalise on anychanges proposed to the regulatory structures around distribution. The Retail Distribution Review is still in its veryearly stages and we will continue to play an active role in the debate it has stimulated. =========================================================================================================== Enquiries to: Investors:Andrew Palmer, Group Director (Finance) 020 7528 6286Jonathan Maddock, Head of Investor Relations 020 7528 6298Nicola Marshall, Investor Relations Manager 020 7528 6263 Media:John Morgan, Media Relations Director 020 7528 6213Anthony Carlisle, Citigate Dewe Rogerson 07973 611888 ======================================================================================================================= Page 5 Notes:------ • Issued share capital at 30 June 2007 was 6,535,517,371 shares of 2.5p each. • A copy of this announcement can be found on the "Results" page of our shareholder website at http://investor.legalandgeneral.com/results.cfm. • A presentation to analysts and fund managers will take place at 09.30 BST today at Temple Court, 11 Queen Victoria Street, London EC4N 4TP. There will be a live audiocast of the presentation which can be accessed at http://investor.legalandgeneral.com/ presentations.cfm. A replay will be available on this website later today. The presentation slides will be available from 09.20 BST at http://investor.legalandgeneral.com/presentations.cfm. • There will be a live listen only teleconference link to the presentation. UK investors should dial 0800 6942 586 and overseas investors should dial +44 (0)1452 567 098. The conference ID number is 6793361. The following financial information was approved by the Board on 25 July 2007. The results for the six months to 30 June 2007 and 30 June 2006 are unaudited, but have been subject to a review by theindependent auditors and constitute non-statutory accounts within the meaning of Section 240 of the Companies Act 1985.The Group consolidated financial statements for the year ended 2006, published on 13 March 2007, have been filed withthe Registrar of Companies and include an independent auditors' report which is unqualified and does not contain astatement under either Sections 237(2) or 237(3) of the Companies Act 1985. Financial calendar:------------------- -----------------------------------------------------------------------------------------------------------------------Ex-dividend date for Interim dividend 5 September 2007-----------------------------------------------------------------------------------------------------------------------Record date for Interim dividend 7 September 2007-----------------------------------------------------------------------------------------------------------------------Payment date for Interim dividend 1 October 2007-----------------------------------------------------------------------------------------------------------------------Q3 2007 New business results 17 October 2007-----------------------------------------------------------------------------------------------------------------------Q4 2007 New business results 24 January 2008-----------------------------------------------------------------------------------------------------------------------Preliminary Results 2007 13 March 2008-----------------------------------------------------------------------------------------------------------------------AGM - taking place at the Institute of Engineering and Technology, Savoy Place, London 14 May 2008-----------------------------------------------------------------------------------------------------------------------Interim Results 2008 1 August 2008----------------------------------------------------------------------------------------------------------------------- A Dividend Reinvestment Plan is available to shareholders. Forward-looking statements:--------------------------- This document may contain certain forward-looking statements with respect to certain of Legal & General Group Plc'splans and its current goals and expectations relating to future financial condition, performance and results. By theirnature forward-looking statements involve risk and uncertainty because they relate to future events and circumstanceswhich are beyond Legal & General Group Plc's control, including, among others, UK domestic and global economic andbusiness conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies andactions of governmental and regulatory authorities, the impact of competition, the timing, impact and otheruncertainties of future mergers or combinations within relevant industries. As a result, Legal & General Group Plc'sactual future condition, performance and results may differ materially from the plans, goals and expectations set outin Legal & General Group Plc's forward-looking statements. Legal & General Group Plc does not undertake to updateforward-looking statements contained in this document or any other forward-looking statement it may make. ======================================================================================================================= Page 6Table of contents----------------- Page-----------------------------------------------------------------------------------------------------------------------Business review 7-----------------------------------------------------------------------------------------------------------------------New business 15-----------------------------------------------------------------------------------------------------------------------European Embedded Value- Consolidated income statement 20- Consolidated balance sheet 21- Consolidated statement of recognised income and expense 21- Profit from continuing operations after tax from covered business 22- Analysis of experience variances 24- Analysis of operating assumption changes 25- Variation from longer term investment return 26- Time value of options and guarantees 26- Investment management income statement 26- Analysis of tax 27- Effect of UK Budget tax changes 27- Earnings per share 28- Embedded value reconciliation 30- Analysis of ordinary shareholders' equity 33- Segmental analysis of shareholders' equity 34- Reconciliation of shareholder net worth 35- Assumptions 36-----------------------------------------------------------------------------------------------------------------------International Financial Reporting Standards- Operating profit income statement 39- Consolidated income statement 40- Consolidated balance sheet 41- Consolidated statement of recognised income and expense 42- Consolidated cash flow statement 43- Contribution from UK non profit business 46- Analysis of tax 46- Earnings per share 47- Gross written premiums 48- Segmental analysis 48- Financial investments 49- Segmental analysis of ordinary shareholders' equity 50- Analysis of borrowings 50- Non linked invested asset mix and investment return 52- Pension cost 53- Contingent liabilities, guarantees and indemnities 53-----------------------------------------------------------------------------------------------------------------------Capital and cash flow- Regulatory capital resources 54- IFRS capital resources 56- Group credit ratings 58- Distributions to shareholders from Society's long term fund 59- Group cash flow statement 59-----------------------------------------------------------------------------------------------------------------------Appendices 60======================================================================================================================= ======================================================================================================================= Page 7 Business review=============== New business============ H1 2007 H1 2006 PVNBP PVNBP£m APE PVNBP Contribution Margin (%) APE PVNBP Contribution Margin (%)-----------------------------------------------------------------------------------------------------------------------UK life and pensions:Protection 111 563 51 9.1 111 555 45 8.0Annuities 86 862 87 10.1 71 708 100 14.1Unit linked bonds 136 1,355 21 1.5 121 1,213 36 3.0Pensions - Stakeholder andother non profit 133 920 (5) (0.5) 93 535 (8) (1.5)With-profits 132 772 11 1.4 100 602 6 1.0-----------------------------------------------------------------------------------------------------------------------Total UK life and pensions newbusiness 598 4,472 165 3.7 496 3,613 179 4.9----------------------------------------------------------------------------------------------------------------------- International life andpensions 63 507 13 2.6 57 482 13 2.7-----------------------------------------------------------------------------------------------------------------------Total life and pensions newbusiness 661 4,979 178 3.6 553 4,095 192 4.7----------------------------------------------------------------------------------------------------------------------- UK retail investments 167 N/A N/A N/A 342 N/A N/A N/AInternational retail investments 2 N/A N/A N/A 1 N/A N/A N/A-----------------------------------------------------------------------------------------------------------------------Total new business 830 896======================================================================================================================= Institutional fund management £16.2bn £10.8bn======================================================================================================================= UK life and pensions-------------------- Legal & General new UK life and pensions business volumes increased by 24% on a PVNBP basis in the first half of 2007,with growth in annuities, pensions and unit linked bonds, together with stable protection volumes. We saw an increasein new pensions volumes as a proportion of total new business, reflecting the significant expansion of this market overthe last year. Protection---------- Total protection volumes increased by 1% in the first half of 2007 to £563m on a PVNBP basis (H1 06: £555m). Individual protection annual premiums grew by 5% to £82m (H1 06: £78m). The effect of increasing interest rates beganto filter through into housing market activity in the second quarter. Legal & General wrote £40m of new individualprotection business in the second quarter of 2007, compared with £42m in the first, although this was marginally higherthan the second quarter of 2006 (£39m). Group protection annual premiums fell by 12% to £29m (H1 06: £33m) in challenging trading conditions, with increasedcompetition, particularly in the group life segment. We recently launched an innovative group income protection productand are encouraged by early feedback from intermediaries. ======================================================================================================================= Page 8 The protection margin, which incorporates both individual and group protection products, increased from 8.0% in H1 06to 9.1% in H1 07. This represented a reduction against the full year 2006 margin of 10.9%, which included the benefitof the lower reserving requirements on individual protection products resulting from the implementation of the FSA'sPolicy Statement 06/14. We indicated in the Preliminary results 2006 that we expected this boost to margins to moderateover time, and this has indeed occurred in the first half of 2007. Annuities--------- Volumes of both individual and bulk purchase annuities (BPAs) were strong in the first half of 2007 - total newannuities business on a PVNBP basis increased to £862m (H1 06: £708m). Sales of single premium individual annuities were up 130% to £480m in the first half of the year (H1 06: £209m), as themore favourable market conditions of the second half of 2006 continued and bond yields increased further. Sales of BPAs remained buoyant in the first half of 2007 with 108 policies written, amounting to £382m of singlepremiums (H1 06: £499m). Volumes in this line of business fluctuate significantly and 2006 was a record year for newBPA volumes for Legal & General - factors which make prior year comparisons difficult. However, second quarter volumesof £217m were broadly stable compared with the same period last year (Q2 06: £222m). We began to see some increasedquotation activity for "new market" schemes in the second quarter, i.e. for open - as opposed to the traditionalclosed - pension schemes. The annuities margin is strongly influenced by the mix of new business written and, in particular, by the mix betweenlower margin individual and higher margin bulk annuity business. Individual annuities represented 56% of total nonprofit annuity sales, compared with 30% in H1 06 and 41% in FY 06. The aggregate annuity margin for each period was10.1%, 14.1% and 11.0% respectively. The annuity margin at FY 06 was reduced by approximately one percentage point as aresult of the additional solvency capital required following the creation of LGPL in 2006, and the assumption thatassets backing the solvency margin on new business are invested 50:50 in bonds:equities. This effect remained in placein the first half of 2007. Unit linked bonds----------------- We continued to build scale in our unit linked bond business in the first half of 2007. Sales increased by 12% to£1,355m (H1 06: £1,213m), supported by additional unit allocation offers for customers on our Portfolio Bond. Theseoffers continued in the first half of 2007, but at a lower rate than during the second half of 2006, giving rise to areduction in volumes against the second half 2006 (£1,399m). 68% of Portfolio Bond sales in the first half of the yearwere written on-platform, indicating strong support from IFAs for our bond wrap proposition. The unit linked bond margin decreased from 2.0% at the full year 2006 to 1.5% in the first half 2007, due mainly to thepromotional offers mentioned above and competitive conditions. Pensions-------- With changes brought about by pensions A-Day and open architecture, and with improving product economics, we believethat there is now an opportunity to build scale profitably in the pensions market, where we have a growing market share(based on ABI data - FY 06: 6%; Q1 07: 7%). We continue to target single premium transfer business, corporate schemesand incremental business. Annual premiums grew by 11% to £70m (H1 06: £63m) whereas single premium business grew by116% to £635m (H1 06: £294m). Our Individual SIPP product continues to perform well, accounting for over 20% of nonprofit pension sales on a PVNBP basis in the first half of 2007. We also launched our open architecture Group SIPP inthe second quarter. Supported by improved mix and growing scale, the total non profit pensions margin improved from negative 0.7% in thefull year 2006 to negative 0.5% in the first half of 2007. ======================================================================================================================= Page 9 With-profits------------ Annual premium sales of with-profits products increased by 27% to £80m in the first half of 2007 (H1 06: £63m) andsingle premium sales by 39% to £522m (H1 06: £375m). These figures include unit linked savings contracts which offer awith-profits investment option. The strong increase in sales was mainly due to increased pensions volumes but we alsosaw increased demand for with-profits bonds. Customers remain attracted to strong investment returns on assets backingthe with-profits fund. The with-profits margin remained stable at 1.4% when compared with the full year 2006 position. International life and pensions------------------------------- In the USA, we saw robust sales growth of 13% in the first half of 2007 to $293m on a PVNBP basis (H1 06: $260m).Volumes in the Netherlands were down by 12% to €183m (H1 06: €207m) against the backdrop of ongoing challenging marketconditions. However, we believe that we improved our market position over the period. Sales in France grew strongly by21% to €346m on a PVNBP basis (H1 06: €285m), reflecting increased sales of savings products stimulated by regulatorychanges. Retail investments------------------ Worldwide retail investment sales were £169m APE (H1 06: £343m APE). In the UK, individual retail investment businesswas broadly stable in the first half of 2007 at £121m APE (H1 06: £127m APE). However, the volume of institutional andwholesale business written was significantly lower at £46m APE (H1 06: £215m APE). "Institutional" here describesbusiness transacted with charitable organisations, friendly societies and other financial institutions and "wholesale"describes transfers from some of our distribution partners. Both these types of transactions are bulky by nature. Investment management--------------------- LGIM delivered an outstanding £16.2bn of new business in the first half of 2007, an increase of over £5bn compared withthe first half of 2006 (H1 06: £10.8bn). Funds under management stood at £253bn at 30 June 2007 (30 June 2006: £211bn), of which £180bn was invested in indextracking funds on behalf of clients. Our index tracking capabilities, our scale and our commitment to a high level ofclient service are at the heart of our business model, and have combined to deliver strong new business flows over morethan a decade. LGIM continued to expand its capabilities in other product segments. We delivered significant improvements in activeequity investment performance and demand for our Structured Solutions products and services continued to grow, with£6.0bn funds under management at 30 June 2007 (30 June 2006: £3.5bn). In July this year, we were delighted to be recommended by Hermes Investment Management for the provision of passiveequity fund management services to its clients. This is further testimony to LGIM's reputation, products and focus onexcellence in customer service. ======================================================================================================================= Page 10 Profitability============= Consolidated income statement EEV IFRS£m H1 2007 H1 2006 H1 2007 H1 2006-----------------------------------------------------------------------------------------------------------------------From continuing operations:Life and pensions 551 456 290 252Investment management 90 87 73 65General insurance (38) 2 (38) 2Other operational income (14) 15 17 15-----------------------------------------------------------------------------------------------------------------------Operating profit 589 560 342 334Variation from longer term investment return 197 113 21 7Effect of economic assumption changes (6) (18) N/A N/AContribution from UK non profit business N/A N/A 119 39Property income attributable to minority interests 17 21 17 21-----------------------------------------------------------------------------------------------------------------------Profit from continuing operations before tax 797 676 499 401Tax (218) (198) (170) (124)Effect of UK Budget tax changes 93 - N/A N/A-----------------------------------------------------------------------------------------------------------------------Profit from continuing operations after tax 672 478 329 277-----------------------------------------------------------------------------------------------------------------------Profit attributable to minority interests (17) (21) (17) (21)-----------------------------------------------------------------------------------------------------------------------Profit attributable to equity holders of the Company 655 457 312 256======================================================================================================================= Life and pensions operating profit - EEV basis---------------------------------------------- UK International£m H1 2007 H1 2006 H1 2007 H1 2006-----------------------------------------------------------------------------------------------------------------------Contribution from new business (after cost of capital) 165 179 13 13Contribution from in-force business:- Expected return 127 158 40 33- Experience variances 74 53 (6) (6)- Operating assumption changes (10) (7) - 3Development costs (10) (10) - -Contribution from shareholder net worth 151 32 7 8-----------------------------------------------------------------------------------------------------------------------Life and pensions operating profit - EEV basis 497 405 54 51======================================================================================================================= UK life and pensions operating profit - EEV basis------------------------------------------------- UK life and pensions operating profit increased by 23% to £497m (H1 06: £405m). The contribution from new business decreased to £165m in the first half of 2007 (H1 06: £179m), with a greaterproportion of pensions business written, a lower unit linked bond margin and a lower margin mix on our annuitiesbusiness. The expected return from in-force business was £127m (H1 06: £158m), reflecting the unwinding at a higher opening riskdiscount rate of 7.6% (2006: 7.1%) on a lower opening in-force value. The in-force value was lower at the end of 2006than at the end of 2005 due to the impact of corporate restructuring and reserve changes, which we highlighted in our2006 Preliminary results. Experience variances for the first half of 2007 were positive £74m (H1 06: positive £53m). This consisted almostexclusively of the effect of moving to market referenced fees for investment management services provided by LGIM toSociety - these were historically charged on a cost recovery basis. The effect totalled a positive £88m, reflecting theincreased underlying value of with-profits business from adopting the EEV look through principle, and the smallreduction in value of non profit business as a result of allowing for higher regulatory reserves, which now includemarket referenced fees. ======================================================================================================================= Page 11 Operating assumption changes were negative £10m (H1 06: negative £7m). Development costs of £10m (H1 06: £10m) related primarily to improvements to our pensions administration systems. The contribution from shareholder net worth was £151m (H1 06: £32m). The shareholder net worth comprises the embeddedvalue of the SRC and Sub-fund and, since the end of 2006, the shareholder capital of LGPL. The contribution fromshareholder net worth comprised: - In respect of Society: the unwind at a higher opening risk discount rate (7.6% in H1 07 vs 7.1% in H1 06) on a higher adjusted opening embedded value of the SRC and Sub-fund. This figure was grossed up at a tax rate of 28% (H1 06: 20%) reflecting the new corporation tax rate from April 2008. - In respect of LGPL: an expected investment return on the opening shareholder capital, after the payment of interest on the £400m internal subordinated debt. - There were additionally some small negative adjustments amounting to £16m in total. International life and pensions operating profit - EEV basis------------------------------------------------------------ EEV operating profit from our international operations grew by 6% to £54m (H1 06: £51m). This primarily reflectedgrowth in the expected return, as higher opening risk discount rates were applied to higher opening embedded values.The contribution from new business for the period reflected the absence of Triple X financing for our US protectionbusiness. Life and pensions operating profit - IFRS basis----------------------------------------------- £m H1 2007 H1 2006-----------------------------------------------------------------------------------------------------------------------UK operating profit:- Distribution relating to non profit and shareholder net worth 199 157- Subordinated debt interest - 18- With-profits business 50 40----------------------------------------------------------------------------------------------------------------------- 249 215International operating profit:USA 32 33Netherlands 4 (3)France 5 7-----------------------------------------------------------------------------------------------------------------------Life and pensions operating profit - IFRS basis 290 252======================================================================================================================= UK life and pensions operating profit - IFRS basis-------------------------------------------------- The UK life and pensions operating profit increased by 16% to £249m in the first half of 2007 (H1 06: £215m). Thiscomprised: - The distribution relating to non profit and shareholder net worth, which grew by 27% to £199m (H1 06: £157m). In any year, this is based on the formula agreed with our regulator and is detailed in note 5.04. - Profits from the with-profits business, which increased by 25% to £50m in H1 07 (H1 06: £40m), reflecting increases in bonuses applied to a higher level of maturities and other claims.Internal subordinated debt of £602m was repaid from the SRC to Legal & General Group Plc in December 2006 as part ofthe Corporate restructuring, which we highlighted in our 2006 Preliminary results. There is therefore no subordinateddebt interest transfer from Society in the first half of 2007. International life and pensions operating profit - IFRS basis------------------------------------------------------------- International life and pensions operating profit grew to £41m in the first half of 2007 (H1 06: £37m). This was owingmainly to an increase in operating profit in our operations in the Netherlands (H1 07: £4m profit; H1 06: £3m loss) -under IFRS, all assets but not all liabilities are valued at fair value, leading to ongoing volatility in this line. ======================================================================================================================= Page 12 Investment management operating profit - IFRS basis--------------------------------------------------- £m H1 2007 H1 2006-----------------------------------------------------------------------------------------------------------------------Managed pension funds 51 45Ventures - 2Property 5 4Retail investments 6 5Other income 11 9-----------------------------------------------------------------------------------------------------------------------Investment management operating profit 73 65-----------------------------------------------------------------------------------------------------------------------Cost/income ratio 46% 36%======================================================================================================================= Operating profits from our investment management business increased by 12% to £73m (H1 06: £65m). This was due mainlyto the growth in pension funds under management to £160bn at 30 June 2007 (30 June 2006: £130m), driven by acombination of excellent new business figures and high levels of client retention. Other income of £11m (H1 06: £9m)included £4m of profits arising from market referenced fees charged for the provision of investment management servicesto LGPL. The cost/income ratio increased to 46% (H1 06: 36%), primarily as a result of the costs of transferring to newCity premises, scheduled for the second half of the year, and planned investment in people and systems across thebusiness. Our supplementary reporting also includes details of the results of our managed pension funds business on an EEV basiswhich can be found in section 3 of the financial information. General insurance operating result - IFRS basis----------------------------------------------- H1 2007 H1 2006 Operating Underwriting Operating Underwriting£m (loss)/profit result profit result-----------------------------------------------------------------------------------------------------------------------Household (52) (59) 2 (3)Other 14 11 - (3)-----------------------------------------------------------------------------------------------------------------------General insurance result (38) (48) 2 (6)======================================================================================================================= Our General insurance business recorded a pre-tax operating loss of £38m in the first half of 2007, compared with a £2mprofit in the same period last year. This was due to increased household claims following windstorm Kyrill in January,which gave rise to £8m in claims, and two flooding events in June this year, giving rise to estimated claims of £40mnet of reinsurance. The final impact of the severe flooding from 20 July 2007 has not yet been quantified. However,early indications suggest that it could give rise to claims of the order of £30m net of reinsurance in the second halfof 2007. Other operating profit for the first half of 2007 included a profit of £6m following our decision to withdrawfrom the healthcare market earlier in the year. Other operational income - IFRS and EEV basis--------------------------------------------- H1 2007 H1 2006£m EEV IFRS EEV & IFRS-----------------------------------------------------------------------------------------------------------------------Shareholders' other income:- Investment return on ordinary shareholders' equity 59 90 69- Interest expense (55) (55) (48)----------------------------------------------------------------------------------------------------------------------- 4 35 21Other operations - - (1)Unallocated corporate and development expenses (18) (18) (5)-----------------------------------------------------------------------------------------------------------------------Other operational income (14) 17 15======================================================================================================================= ======================================================================================================================= Page 13 Following the creation of LGPL in 2006, the investment return on LGPL ordinary shareholders' capital on an EEV basis isreported as covered business within "Contribution from shareholder net worth". On an IFRS basis, investment return onLGPL ordinary shareholders' equity is reported within "Other operational income". The investment return increased to£90m (H1 06: £69m) following the growth in opening Society shareholder capital to £2,257m (FY 05: £1,896m). Interest expense increased to £55m in H1 07, broadly in line with the charge for the second half of 2006 (H2 06: £58m). Unallocated corporate and development expenses of £18m include ongoing financial project costs and the development ofour International bond product. Profit attributable to equity holders------------------------------------- EEV IFRS£m H1 2007 H1 2006 H1 2007 H1 2006-----------------------------------------------------------------------------------------------------------------------Operating profit 589 560 342 334Variation from longer term investment return 197 113 21 7Effect of economic assumption changes (6) (18) N/A N/AContribution from UK non profit business N/A N/A 119 39Property income attributable to minority interests 17 21 17 21-----------------------------------------------------------------------------------------------------------------------Profit from continuing operations before tax 797 676 499 401Tax (218) (198) (170) (124)Effect of UK Budget tax changes 93 - N/A N/A-----------------------------------------------------------------------------------------------------------------------Profit from continuing operations after tax 672 478 329 277-----------------------------------------------------------------------------------------------------------------------Profit attributable to minority interests (17) (21) (17) (21)-----------------------------------------------------------------------------------------------------------------------Profit attributable to equity holders of the Company 655 457 312 256======================================================================================================================= EEV basis--------- Below the EEV operating profit line, there were two main variances against the first half of 2006. The variation fromlonger term investment return rose by £84m to £197m (H1 06: £113m), primarily as a result of outperformance in equitiesand property, partly offset by a reduction in the value of bond portfolios as a result of increased yields. There was also a one-off increase to embedded value of £93m, relating primarily to the reduction in the corporation taxrate from 30% to 28% from April 2008. IFRS basis---------- The increase in the variation from longer term investment return to £21m in H1 07 (H1 06: £7m) is principally due toimproved equity returns, partly offset by decreasing bond portfolios as a consequence of rising bond yields. The net capital released from the non profit business increased to £153m (H1 06: £110m). Within this, the new businessstrain of £142m (H1 06: £185m, after financing arrangements) was covered by the expected release from the in-force bookof £211m (H1 06: £264m, after financing arrangements), all on a net of tax basis. These two figures were substantiallylower than the comparatives for H1 06, reflecting the implementation of new reserving rules under the FSA's PolicyStatement 06/14 at the end of 2006. The overall impact of other movements on the net capital released after tax waspositive £38m (H1 06: negative £2m). In note 4.07 to these results, we indicate that our estimate of the potential IFRS deferred tax charge on ahypothetical full distribution of the SRC reduced from £717m at the full year 2006 to £295m at the end of June 2007.This resulted from tax changes in the Finance Act 2007, which could allow capital to be released from the SRC at asignificantly lower net tax rate than previously. ======================================================================================================================= Page 14 Capital and financing--------------------- The Group is required to measure and monitor its capital resources on a regulatory as well as an IFRS basis and tocomply with the minimum capital requirements of regulators in each territory in which it operates. In general, theregulators require more prudent assumptions than IFRS. Legal & General's total capital resources are substantially inexcess of both total regulatory capital and the minimum regulatory capital it is required to hold. At Group level, the Insurance Groups Directive capital surplus was £2.6bn (31 December 2006: £2.0bn) in excess of therequired capital of £4.5bn (31 December 2006: £4.6bn). The capital requirement included £0.6bn (31 December 2006:£0.6bn) relating to LGPL, which would not be required if LGPL were converted to an ISPV. The total regulatory capital resources available to Society, the Group's main UK operating subsidiary, amounted to£9.0bn at 30 June 2007 (31 December 2006: £9.4bn) and exceeded the total capital requirements by £4.5bn (31 December2006: £4.9bn). The capital requirement included £0.6bn (31 December 2006: £0.6bn) relating to LGPL. As at 30 June 2007, the value of the assets supporting the UK with-profits business was estimated to have exceededrealistic liabilities by £1,174m (31 December 2006: £1,128m). The required Risk Capital Margin (RCM) for thewith-profits part of the fund, calculated by reassessing realistic assets and liabilities in financially stressedconditions, was £236m at 30 June 2007 (31 December 2006: £465m). The RCM continued to benefit from management actions,which included refinements to our management of investment market risk. In May 2007, the Group issued £600m perpetual capital securities which have been reported as Innovative tier Iregulatory capital for IGD purposes. Capital balanced scorecard measures----------------------------------- We first outlined our balanced scorecard for capital management in November 2006. These are updated at everyPreliminary and Interim results announcement. We will review the planning ranges each year as part of our annual five year financial projection and stress testingexercise and, if appropriate, we will recalibrate them to take account of business volumes, changes to corporatestructure or developments in regulatory or financial reporting regimes. Indicative planning ranges H1 2007 2006-----------------------------------------------------------------------------------------------------------------------IGD surplus capital £1-2bn £2.6bn £2.0bnSociety surplus capital £2.5-3.5bn £4.5bn £4.9bnEconomic capital Strong AA Very strong AA Very strong AAReturn on embedded value Increase over medium term 11.1% 12.5%======================================================================================================================= This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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