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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Legal & General Group Plc | LSE:LGEN | London | Ordinary Share | GB0005603997 | ORD 2 1/2P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1.60 | 0.69% | 234.40 | 234.30 | 234.50 | 236.30 | 234.20 | 235.30 | 18,785,779 | 16:29:59 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Ins Agents,brokers & Service | 36.48B | 457M | 0.0764 | 30.68 | 14.02B |
From Apr 2019 to Apr 2024
TIDMLGEN
RNS Number : 2668X
Legal & General Group Plc
09 August 2018
Legal & General Group PLC Interim Management Report 2018
H1 2018: Consistent delivery of growth from divisions
Financial highlights
-- OPERATING PROFIT(1) FROM DIVISIONS(2) UP 7% TO GBP1,059M (H1 2017: GBP994M), increases in 5 out of 6 businesses since H1 2017
-- OPERATING PROFIT(1) OF GBP909M, up 5% (H1 2017: GBP862m excluding mortality release) after increased investment in the business
-- EARNINGS PER SHARE(3) DOWN 8% TO 13.00P (H1 2017: 14.19P), impacted by financial markets -- PROFIT AFTER TAX DOWN 19% TO GBP772M (H1 2017: GBP952M) -- RETURN ON EQUITY(1) AT 20.3% (H1 2017: 26.7%) -- INTERIM DIVID(4) OF 4.60P PER SHARE (H1 2017: 4.30P) -- SOLVENCY II COVERAGE RATIO(5) OF 193% (H1 2017: 186%) -- SOLVENCY II OPERATIONAL SURPLUS GENERATION UP BY 11% TO GBP0.7BN (H1 2017: GBP0.6BN)
Business highlights
Investing & Annuities
-- LGR ANNUITY SALES OF GBP1.1BN(6) (H1 2017: GBP2.0BN) -- LGR LIFETIME MORTGAGE ADVANCES UP 23% TO GBP0.5BN (H1 2017: GBP0.4BN) -- GROUP-WIDE DIRECT INVESTMENT UP 38% AT GBP16.3BN (H1 2017: GBP11.8BN)
Investment Management
-- LGIM AUM UP 4% AT GBP984.8BN (H1 2017: GBP951.1BN)
-- LGIM EXTERNAL NET FLOWS OF GBP14.6BN (H1 2017: GBP21.7BN), US FLOWS $11.5BN (H1 2017: $10.8BN)
Insurance
Hot Features
Premium
-- LGI GROSS WRITTEN PREMIUMS UP 3% TO GBP1.4BN(6) (H1 2017: GBP1.3BN)
-- GENERAL INSURANCE GROSS WRITTEN PREMIUMS UP 12% TO GBP193M (H1 2017: GBP173M)
"Legal & General again delivered consistent, positive results with
five of our six businesses increasing their operating profits for
the first half of 2018. Operating profit from divisions increased
7% to GBP1.1 billion and RoE was 20.3%. However, a reduction in
positive investment variance meant earnings per share were down
from 14.19p to 13.00p. We have increased our dividend to 4.60p,
in line with our formulaic approach, an increase of 7%.
We expect to have an exceptionally busy H2. We are currently actively
quoting on over GBP20bn of UK pension risk transfer deals, including
over GBP7bn of transactions in exclusive negotiations expected to
close in H2. We are reviewing our long term mortality assumptions
and expect to make a full year release in H2 which will be larger
than the GBP332m released for full year 2017. LGIM's momentum continues
as it expands in the United States and extends its global footprint
in Asia. LGC is accelerating UK investment through its "Changing
Britain" programme which reflects growing regional devolution. We
are confident that Legal & General is strongly positioned for growth
in H2 and beyond."
-----------------------------------------------------------------------------
Nigel Wilson, Group Chief Executive
1. The Alternative Performance Measures within the Group's financial highlights are defined in the glossary, on pages 99 to 104 of this report.
2. Represents operating profit from divisions and excludes mortality reserve releases (H1 2018: GBPnil, H1 2017: GBP126m). H1 2017 release reflects changes to LGR's base mortality assumptions.
3. Excluding mortality reserve releases (H1 2018: GBPnil, H1 2017: GBP126m).
4. A formulaic approach is used to set the interim dividend, being 30% of the prior year full year dividend.
5. Solvency II coverage ratio on a shareholder basis is adjusted for the Own Funds and SCR of the With-profits fund and the final salary pension schemes.
6. Constant FX rate comparisons have been calculated by applying the average FX rates for H1 2017 to both H1 2017 and H1 2018 local currency results. Actual FX rate comparisons apply the H1 17 and H1 18 average FX rates to the equivalent periods' results respectively.
Financial summary
GBPm H1 2018 H1 2017 Growth
%
================================================= ======= ============== ======
Analysis of operating profit
Legal & General Retirement (LGR) excl. mortality
reserve release(1) 480 440 9
- LGR Institutional (LGRI) 361 333 8
- LGR Retail (LGRR) 119 107 11
Legal & General Investment Management (LGIM) 203 194 5
Legal & General Capital (LGC) 172 142 21
Legal & General Insurance (LGI)(2) 154 147 5
General Insurance (6) 15 n/a
Continuing operating profit from divisions 1,003 938 7
Mature Savings(3) 56 52 8
Legal & General Netherlands(4) - 4 n/a
Operating profit from divisions excl. mortality
reserve release 1,059 994 7
-------------------------------------------------- ------- -------------- ------
Group debt costs (97) (92) (5)
Group investment projects and expenses (53) (40) (33)
Operating profit excl. mortality reserve release 909 862 5
-------------------------------------------------- ------- -------------- ------
Legal & General Retirement (LGR) mortality - 126 n/a
reserve release
Operating profit 909 988 (8)
Investment and other variances (incl. minority
interests)(5) 33 175 (81)
Profit before tax attributable to equity holders 942 1,163 (19)
Profit before tax excl. mortality reserve
release 942 1,037 (9)
Profit after tax 772 952 (19)
Profit after tax excl. mortality reserve release 772 848 (9)
Earnings per share (p) 13.00 15.94 (18)
Earnings per share excl. mortality reserve
release (p) 13.00 14.19 (8)
Return on equity(6) (%) 20.3 26.7 n/a
Interim dividend per share (p) 4.60 4.30 n/a
Net release from continuing operations(7) 658 673 (2)
Net release from discontinued operations 22 51 n/a
Dividend from subsidiary in respect of mortality - 100 n/a
releases(8)
Total release 680 824 n/a
==================================================
1. Excludes mortality reserve releases (H1 2018: GBPnil, H1 2017: GBP126m). H1 2017 release reflects changes to LGR's base mortality assumptions.
2. Excludes Legal & General Netherlands which was sold on 6 April 2017.
3. Mature Savings sale to Swiss Re for GBP650m was announced on 6 December 2017.
4. Legal & General Netherlands was sold on 6 April 2017.
5. H1 2018 includes the recognition of a one-off profit of GBP20m arising on the stepped acquisition of CALA Homes (H1 2017 includes GBP17m net profit on disposal of Legal & General Netherland).
6. Return on equity is calculated by dividing annualised profit after tax attributable to equity holders (twice the half year figure), by the average shareholder equity during the period.
7. Excludes Mature Savings and Legal & General Netherlands.
8. Represents dividend from Legal & General Assurance Society Ltd (LGAS) to Group, in addition to normal LGAS dividend, arising due to base mortality reserve releases in H1 2017.
H1 2018 financial performance
Income statement
Operating profit from divisions(8) increased 7% to GBP1,059m (H1 2017: GBP994m). Total operating profit(8) increased 5% to GBP909m (H1 2018: GBP862m), including increased investment in technology across the divisions.
LGR delivered a 9% increase in operating profit(8) to GBP480m (H1 2017: GBP440m). The backbook has continued to perform strongly and new business profit has emerged in line with H1 sales.
LGIM operating profit increased by 5% to GBP203m (H1 2017: GBP194m). Management fee revenues were GBP396m (H1 2017: GBP382m) and AUM reached GBP985bn (H1 2017: GBP951bn). Fee revenues were impacted by lower asset values in Q1 due to challenging market conditions offset in part by external net inflows of GBP14.6bn (H1 2017: GBP21.7bn). LGIM has also continued to invest in the business to support its international and retail growth strategies, and has maintained a stable cost income ratio of 51%.
LGC operating profit increased by 21% to GBP172m (H1 2017: GBP142m) driven by continued good performance in the GBP2.0bn (H1 2017: GBP1.3bn) direct investment portfolio which contributed GBP104m (H1 2017: GBP69m). This included an additional contribution from CALA Homes following the acquisition of the remaining 52.1% of the business in March 2018.
LGI operating profit increased by 5% to GBP154m (H1 2017: GBP147m). Some one-off model enhancements in UK Retail Protection and the continued improvement in UK Group Protection performance were partially offset by a year on year variance in US mortality experience, following the prior half year favourable experience.
General Insurance operating profit decreased to GBP(6)m (H1 2017: GBP15m), largely as a result of weather experience in Q1 2018, in line with the wider market. Excluding this adverse impact, operating profit was GBP22m and the combined operating ratio was 92%.
On 6 December 2017 we announced the sale of our Mature Savings business to Swiss Re for GBP650m. In H1 2018, we recognised GBP56m operating profit from the business comprising the unwind of the expected underlying profits and the release of a one-off GBP33m provision, which is no longer required following the transaction.
Profit before tax(8) attributable to equity holders was GBP942m (H1 2017: GBP1,037m).
Profit before tax decreased due to lower positive investment variance as a result of volatility in global financial markets in H1 2018 (H1 2018: GBP33m, H1 2017: GBP175m). This included a GBP(90)m (H1 2017: GBP52m) loss primarily from the LGC traded assets portfolio, reflecting market performance versus our long term economic assumptions. This was offset by gains in LGR due in part to a number of trading actions in preparation for a significant H2 UK PRT new business pipeline. Consistent with prior years, there was an accounting gain driven by the Group's defined benefit pension scheme which includes accounting valuation differences arising on annuity assets held by the scheme.
Net release from continuing operations(9) was GBP658m (H1 2017: GBP673m), comprising GBP656m (H1 2017: GBP630m) release from operations and GBP2m (H1 2017: GBP43m) new business surplus. The small decrease was primarily due to lower LGR new business volumes in H1 2018.
Balance sheet
The Group's Solvency II operational surplus generation increased 11% to GBP0.7bn (H1 2017: GBP0.6bn) and after new business strain of GBP0.1bn (H1 2017: GBP0.1bn), net surplus generation was GBP0.6bn (H1 2017: GBP0.5bn). This supported a Solvency II coverage ratio(10) of 193% at the end of H1 2018 (H1 2017: 186%, FY 2017: 189%).
On a proforma calculation basis(10) , our Solvency II coverage ratio increased from 181% at the end of 2017 to 186% at the end of H1 2018.
The above incorporates management's estimate of the impact of recalculating the Transitional Measures for Technical Provisions (TMTP) as at 30 June 2018 as we believe this provides the most up to date and meaningful view of our Solvency II position. In line with guidance, the next formal recalculation will take place no later than 1 January 2020.
We continue to deliver a strong IFRS return on equity of greater than 20% (H1 2018: 20.3%, H1 2017: 26.7%).
8. Excludes mortality reserve releases (H1 2018: GBPnil, H1 2017: GBP126m). H1 2017 release reflects changes to LGR's base mortality assumptions.
9. Excludes businesses disposed of comprising Mature Savings and Legal & General Netherlands.
10. Solvency II coverage ratio on a shareholder basis excludes the SCR of the With-profits fund and the final salary pension schemes from both the Own Funds and SCR. The
Outlook
The Group's strategy is aligned to our six established long term growth drivers: ageing demographics; globalisation of asset markets; creating new real productive assets; reform of the welfare state; technological innovation; and providing "today's capital". We focus on attractive high growth markets where we can leverage our expertise. The clear synergies between our divisions are expected to deliver further profit growth in the future. Our business model is focused on three areas:
Investing & Annuities - Legal & General Retirement (LGR), and Legal & General Capital (LGC)
Investment Management - Legal & General Investment Management (LGIM)
Insurance - Legal & General Insurance (LGI), and General Insurance (GI)
We are confident Legal & General will see continuing momentum in H2 2018, and we are on track to deliver a similar performance out to 2020 as that achieved in 2011-2015; where EPS grew by 10% per annum. Legal & General is well placed to grow further and take advantage of organic growth opportunities, bolt-on M&A, sourcing direct investments, and investing in our existing infrastructure. To support these plans, we will invest in technology in a measured way across the Group, as previously reported.
The Group's balance sheet remains strong with GBP6.9bn in surplus regulatory capital and has significant buffers to absorb a market downturn. Furthermore, the structural drivers, on which the Group's strategy is based, are largely unaffected by on-going political and economic uncertainty. So while no business model can be fully immune to market volatility, our operating model is resilient as well as being underpinned by thoughtful and effective risk management practices.
Investing and Annuities
In LGR's Institutional business, the demand for UK pension de-risking strategies is expected to reach new heights as more pension schemes are able to afford bulk annuities due to improved pension scheme funding levels resulting from buoyant markets in 2017 and heavier mortality experience lowering the cost of annuities. Market participants(11) forecast up to GBP20bn of UK pension risk transfer (PRT) transactions to close in 2018, and we are actively quoting on more than GBP20bn of PRT deals. We anticipate 2018 UK PRT market transaction volumes will be weighted towards H2 due to a number of large, late stage transactions that are expected to complete in the third quarter. In the US we have more than doubled our PRT sales in H1 2018, and expect to continue this positive momentum in the second half of the year, during which we have historically seen more activity. As always, we will remain disciplined in the deployment of our capital, and will only select PRT and longevity opportunities that meet our return on capital hurdle rates.
Demographic changes will see LGR Retail's target market continue to grow, both in terms of the numbers of retirees and the levels of wealth they hold. New product innovation is expected to boost market volumes in individual annuities and lifetime mortgages. We have focused on refining our enhanced annuity offering and expect this to allow us to compete effectively in this growing market segment. Our leading lifetime mortgage business, which made GBP521m advances in H1 2018, currently has a 28% market share, and we continue to benefit from strong distribution and partnership agreements. In July 2018 we announced a new five year partnership agreement with Virgin Money to provide lifetime mortgage solutions to their interest-only customers approaching retirement. We anticipate total lifetime mortgage market volumes of over GBP6bn by 2020, up from GBP4bn forecast for 2018.
As in previous years, we are reviewing updated experience data against our longevity trend assumptions, and we intend to make amendments as necessary in H2 2018 to reflect our analysis of the next set of mortality tables (CMI 2016). We continue to see evidence of higher than expected mortality. In 2017, our mortality analyses resulted in a pre-tax release of GBP332m of prudence within our reserves. At this stage in our review of the CMI 2016 mortality tables, we anticipate a GBP300m to GBP400m release to be recognised in our 2018 full year results.
LGC will continue to seek opportunities to deploy its long-term patient capital in real assets primarily across the UK. We see an enduring need for private long-term capital in real assets such as housing, urban development and innovation in funding for SMEs and early stage enterprises.
11. Source: Financial Times, "Bulk annuity deals with insurers set for record"; Hymans Robertson, "2018 likely to be most active year ever for buy-ins and buy-outs"; LCP, " 2018 De-risking Report"; Pension & Investments "UK bulk annuity market set for a record year.
In housing, LGC will continue to grow its multi-tenure business across build-to-sell, later living and affordable housing. With full ownership of CALA Homes from March 2018, our house building capacity has increased and we are positioned well for further growth. We are both a developer and operator of communities for later living in suburban, rural and, looking forward, urban environments. We see high potential for long-term growth in this underserved sector of the UK housing market. Being both a developer and operator gives both good alignment with our customers and a more stable revenue profile relative to developer-only business models.
Working closely with LGIM Real Assets, LGC will continue to apply capabilities in commercial real estate, residential property, infrastructure and clean energy to work with partners in cities around the UK as they develop their urban environments. Legal & General is well placed to bring together on-balance sheet or third party private capital with the development capability to make a difference to UK cities and achieve our aim to be both socially useful and economically useful.
Investment Management
In LGIM, we have continued to diversify our business - building on our strengths in the UK defined benefit (DB) market to position the business for strong growth in defined contribution (DC) and international markets, in particular, in the US. On 20 June 2018 we held a Capital Markets Event focusing on LGIM's culture, business and strategy. LGIM outlined its strategy for continued growth via broadening its investment capabilities, addressing the UK savings gap and internationalising its core institutional strengths. LGIM is benefiting from global trends driving increasing customer demand for its investment capabilities and products supported by strong cost efficiency, while its increasingly scaled Workplace, Retail and Personal Investing businesses offer attractive growth opportunities as these markets develop. These competitive advantages have been crucial to LGIM's success to date and underpin the division's operating growth target of 8% to 10% per annum over the medium term, assuming normal market conditions.
Our international AUM has grown by a 22% CAGR since 2014 and is now at GBP229.3bn (H1 2017: GBP198.3bn). Overall, we expect international inflows to gain momentum in the second half of 2018 as late stage pipeline opportunities are realised. By the end of 2018 we will have launched a core range of LGIM ETFs(12) to target a portion of the c.$800bn of ETF flows in Europe. We are the market leader(12) in UK DC assets with total assets of GBP72.3bn (H1 2017: GBP62.8bn). We will continue to invest in areas of the business that are experiencing strong growth, with operational leverage in our core business areas allowing us to maintain a relatively stable cost income ratio of around 50%, although we expect this to be slightly higher in the short term as we invest.
Insurance
In LGI, we anticipate continued premium growth across our UK and US businesses. In the UK, we have seen the continued turnaround of our group protection business leading to improved new business performance and a return to profitability. In our leading retail protection business we expect to continue growing premiums and generating good profits in H2, supported by distribution and product enhancements. In the US we expect our on-going investment in digital transformation to result in new business growth while maintaining healthy profits. The alignment of reserving approaches between UK and US will impact on 2018 US reported profits. We expect the US business to continue to grow from the H1 2018 result.
In General Insurance, we continue to see strong GWP growth across channels and products, up 12% overall on H1 2017. In our household business, we continue to attract significant interest from potential distribution partners and we have signed two agreements in H1 2018. The adverse weather claims in H1 2018 were in line with market experience and absent further weather losses we expect H2 profitability to return to levels consistent with previous years.
Dividend
Legal & General has a progressive dividend policy reflecting the Group's expected medium term underlying business growth, including net release from operations and operating earnings. There is no change to our dividend policy.
In line with Group's policy of using a formulaic approach to setting the interim dividend, being 30% of the prior year full year dividend, the Board has declared an interim dividend of 4.60p per share.
12. Subject to regulatory approval.
13. Source: UK Defined Contribution And Retirement Income, Broadridge 2017.
Legal & General Retirement
FINANCIAL HIGHLIGHTS GBPm H1 2018 H1 2017
Release from operations 275 256
New business surplus 23 51
Net release from operations 298 307
Experience variances, other assumption changes,
tax and non-cash movements 182 133
Operating profit excluding mortality reserve
release 480 440
- LGR Institutional 361 333
- LGR Retail 119 107
Longevity assumption changes - 126
Operating profit 480 566
Investment and other variances 85 38
================================================== ======= ========
Profit before tax 565 604
================================================== ======= ========
UK PRT 507 1,504
International PRT 228 115
Individual annuity single premiums 337 345
Lifetime mortgage advances 521 424
Longevity insurance(1) - 800
Total LGR new business 1,593 3,188
Total annuity assets (GBPbn) 56.4 55.6
================================================== ======= ========
1. Represents the notional size of reinsured longevity insurance transactions and is based on the present value of the fixed leg cashflows discounted at the LIBOR curve.
Operating profit up 9% to GBP480m(14)
Operating profit increased to GBP480m (H1 2017: GBP440m excluding the H1 2017 base mortality reserve release) driven by stable profits emerging from LGR's growing annuity portfolio (H1 2018: GBP56.4bn, H1 2017: GBP55.6bn).
Release from operations increased 7% to GBP275m (H1 2017: GBP256m), reflecting the increased scale of the business as prudential margins unwind.
Net release from operations was GBP298m (H1 2017: GBP307m) with new business surplus of GBP23m (H1 2017: GBP51m). The decrease in new business surplus reflects lower UK PRT sales in H1 2018 as we maintained pricing discipline.
LGR achieved UK annuity sales of GBP844m delivering a 10.3% new business margin(15) and Solvency II new business strain of less than 4%(14) .
We constantly evaluate the appropriateness of our longevity trend assumptions and we are currently reviewing the CMI 2016 mortality data. Our analysis continues to show evidence of higher than forecasted mortality, which we estimate could equate to GBP300m to GBP400m of prudent reserves and we expect to complete this review by the end of 2018. Consistent with our approach to any assumption review, we exhibit care in our assessment of longevity trends and only recognise applicable releases over several years as greater certainty emerges.
The need for products and services to manage the consequences of ageing populations is increasing, and our strategy is to be at the forefront of this through continuous innovation developed alongside our institutional clients and with our retail customers in mind. This client focus was demonstrated by our innovative structure with the BAA Pension Scheme and through the development of our Optional Payment Lifetime Mortgage. Our client-centric product development will continue to evolve as we work with our clients to disrupt the market with new structures creating different steps on the traditional PRT journey.
14. Excluding GBP126m mortality release in H1 2017.
15. Excludes costs incurred in quoting for business expected to complete in H2 2018 and beyond.
LGR Institutional
Global Pension Risk Transfer
In H1 2018, LGR Institutional (LGRI) completed GBP735m (H1 2017: GBP1,619m) of pension scheme buy-ins and buy-outs across 14 transactions.
Market participants expect up to GBP20bn of UK PRT to close in 2018(16) , with the majority of this being written in the second half of the year. LGRI has carefully managed its pipeline, employing disciplined pricing and focusing primarily on large deals that are expected to transact in H2 and on innovative new transactions that expand the potential PRT client base.
One such transaction was our GBP325m buy-in with the BAA Pension Scheme. The buy-in was supported by an investment in a bespoke corporate bond structure issued by the Scheme's corporate sponsor, Heathrow Airport Limited. This client centric structure widens the addressable market for buy-ins and buy-outs by improving affordability and solving a corporate problem.
The UK private sector DB market is estimated to have GBP2.3 trillion of liabilities, with only c.7% transacted to date. The trend toward decreasing deficits and improving affordability of buy-outs means we expect further growth in this market. We are currently quoting on more than GBP20bn of UK PRT deals.
Our US PRT premiums more than doubled compared to H1 2017 (H1 2018: $297m, GBP220m; H1 2017: $141m, GBP115m), benefiting from investment in a scaled up team. The US market tends to be very cyclical with the majority of business being underwritten in H2, so we expect strong growth to continue through the remainder of the year. The US represents a significant market opportunity, with $3.1 trillion of DB liabilities, and only c.5% transacted to date.
LGR Retail
Individual Retirement Solutions
Lifetime mortgage advances were up 23% at GBP521m (H1 2017: GBP424m), which has been supported through new product innovation and a number of strong distribution and partnership agreements. The portfolio has an average customer age of 70 and the weighted average loan-to-value is c.28% at the transaction date. Our success in this market to date has allowed us to achieve a market share of 28%. Our exposure to LTMs is currently 5% of our total annuity assets. Our LTM portfolio characteristics and low exposure means that we do not expect the Prudential Regulation Authority's (PRA) consultation on LTMs (CP13/18) to have a material impact on our solvency position.
Individual annuity sales were GBP337m in H1 2018, slightly lower than the prior year's of GBP345m, which benefitted from increased H1 sales during a catch up period following the commencement of the Aegon distribution agreement. Adjusting for this catch up period and after enhancements in our products and sales channels we see a 16% increase in Q2 2018 sales (Q2 2018: GBP191m, Q2 2017: GBP164m) and we expect this momentum to continue. We are top three in the UK individual annuity market and have doubled our market share in the past two years, with a current market share of 13%(17) .
On-going credit and asset management
Credit portfolio management
LGR's GBP56.4bn 'A minus' rated asset portfolio backing the IFRS annuity liabilities is well diversified. Within the GBP50.8bn bond portfolio, approximately two-thirds of the portfolio is A-rated or better, 32% BBB-rated and 2% sub-investment grade.
Our fixed income fund managers in LGIM manage the portfolio to avoid credit downgrades and defaults. At the end of H1 2018 our IFRS credit default reserve was GBP2.6bn. We constantly review our asset portfolio, including sector allocations, in order to improve credit quality and to mitigate risks. We are confident our credit portfolio is resilient to market shocks given the robustness of our portfolio construction and the quality of our asset management.
16.Source: Financial Times, "Bulk annuity deals with insurers set for record"; Hymans Robertson, "2018 likely to be most active year ever for buy-ins and buy-outs"; LCP, " 2018 De-risking Report"; Pension & Investments "UK bulk annuity market set for a record year.
17. Q1 2016: 6.5%; Q1 2018: 12.7%
Direct Investment
LGR has had a successful start to the year originating GBP1.5bn of direct investments, including infrastructure and lifetime mortgages. This portfolio is now GBP13.5bn (H1 2017: GBP9.8bn) including GBP2.7bn in lifetime mortgages. We have a robust internal rating process and over half of the direct investment portfolio is rated A and above based on strong counterparties and collateral; for example, our largest exposure is over GBP1.0bn to the UK government. We have retained a significant portion of the 2017 warehoused direct investments in expectation of higher H2 2018 PRT volumes.
The Group's large balance sheet size and long term illiquid liabilities enable LGR to invest in assets of size and term that differentiate it from many other institutional investors. The ability to self-manufacture attractive assets to back annuities, working with LGIM, LGC, or through lifetime mortgages, is an important feature of LGR's business. Including externally sourced investments, the yield enhancement over fixed-rate traded assets typically ranges from 50 to 150+ bps depending on the asset type. In order to further accelerate and grow our capability to invest we have created a dedicated function for Matching Adjustment eligible direct investment and real asset origination working with LGIM and LGC.
Legal & General Investment Management
H1 2018 H1 2017
FINANCIAL HIGHLIGHTS GBPm
Management fee revenue(1) 396 382
Transactional revenue 16 12
========================================================== ================= =============
Total revenue 412 394
Total costs(1) 210 200
Asset management operating profit 202 194
========================================================== ================= =============
ETF operating result(2) (1) -
Workplace Savings operating result(3) 2 -
======================================================== ================= =============
Operating profit 203 194
Investment and other variances (4) (4)
========================================================== ================= =============
Profit before tax 199 190
========================================================== ================= =============
Net release from operations 164 154
========================================================== ================= =============
Cost:income ratio (excluding Canvas)(4)
(%) 51.0 51
Cost:income ratio (including Canvas)(4)
(%) 51.5 51
========================================================== ================= =============
GBPbn
======================================================== ================= =============
Canvas Acquisition 2.4 -
External net flows 14.6 21.7
Internal net flows (2.6) (1.1)
Disposal of LGN(5) - (0.8)
Total net flows 12.0 19.8
- Of which international 9.9 17.9
Cash management flows 1.0 4.1
Persistency (%) 88 90
========================================================== ================= =============
Average assets under management 978.4 930.6
Assets under management 984.8 951.1
- Of which international assets under management(6) 229.3 198.3
========================================================== ====== ========
Assets under administration - Workplace
Savings 29.7 24.9
========================================================== ====== ========
1. Management fee revenue and total costs exclude income and costs of GBP8m in relation to the provision of 3rd party market data (H1 17: GBP8m; FY 17: GBP17m).
2. Canvas represents the revenue and expenses related to the ETF business acquired in H1 2018.
3. Represents Workplace Savings administration business only. Profits on fund management services are included within Asset Management operating profit.
4. Excluding Workplace Savings' administration. 5. Legal & General Netherlands disposal completed on 6 April 2017.
6. International AUM includes assets from internationally domiciled clients plus assets managed in the US on behalf of UK clients.
Operating profit up 5% to GBP203m
LGIM has continued to expand and diversify its business across channels, regions and product lines. This contributed to a 4% growth in assets under management (AUM) to GBP985bn (H1 2017: GBP951bn). External net flows were GBP14.6bn (H1 2017: GBP21.7bn) with a further GBP1.0bn of cash management flows (H1 2017 GBP4.1bn). Our overall position was driven by positive flows from our DC, retail, DB Solutions, and international businesses, offset by the structural shift from our UK DB index business and a single very large outflow of GBP6bn from a local authority scheme, as previously flagged. This demonstrates the benefits of continued diversification. Revenues were up 5% to GBP412m (H1 2017: GBP394m).
Management fees increased by 4% to GBP396m, although this was impacted by market volatility in the first quarter. Transactional revenues also increased to GBP16m (H1 2017: GBP12m) due to higher performance fees and execution fees.
Operating profit increased by 5% to GBP203m (H1 2017: GBP194m), reflecting increased revenues from flows and higher asset base, partially offset by LGIM's continued investment in its growth strategy. The cost income ratio remained stable at 51%.
Workplace Savings assets increased by 19% to GBP29.7bn (H1 2017: GBP24.9bn) driven by continued client wins and increased contributions. We are focused on improving efficiency as the business grows and we delivered a profit in H1 2018 for the first time of GBP2m. This profit is for the administration business only, as the profit on the fund management services provided are included in LGIM's asset management operating profit.
International assets up 16% to GBP229bn
LGIM's international businesses experienced net inflows of GBP9.9bn (H1 2017: GBP17.9bn), underpinned by net inflows of GBP8.3bn (USD: $11.5bn) in the US (H1 2017: GBP: GBP8.6bn, USD: $10.8bn), GBP0.5bn in Europe (H1 2017: GBP6.6bn), and GBP2.5bn in Asia (H1 2017: GBP0.3bn). The Gulf had net outflows of (GBP1.4bn) due to sovereign wealth funds rebalancing their portfolios (H1 2017: GBP2.5bn inflow). We continue to build our international footprint and expect a strong second half, with flows planned for H1 now expected later in the year.
ETF acquisition progressing at pace
We completed the acquisition of Canvas in March and the integration is on track. Total AUM at acquisition was GBP2.4bn and flows since then have been strong.
GBP3.5 billion net flows from DC business
The defined contribution (DC) business continued to grow rapidly with total net inflows of GBP3.5bn (H1 2017: GBP1.7bn), driven by the bundled business which provides administration and investment services to DC schemes. Total UK DC AUM increased by 15% to GBP72.3bn (H1 2017: GBP62.8bn). LGIM has experienced a 21% increase in customers on its Workplace pension platform, with the number of members now at 2.9m (H1 2017: 2.4m). We also have the largest and fastest-growing Mastertrust, which recently surpassed GBP5bn in assets under management, reflecting the continued appeal of the structure for DC schemes wishing to outsource their governance, investment and administration.
Accelerating growth in our retail business
The retail business experienced net inflows of GBP1.4bn (H1 2017: GBP1.8bn), with strong demand for our multi-asset, real asset and index products. Retail AUM increased to GBP25.1bn (H1 2017: GBP21.4bn) as we continue to develop our product range and client-service proposition in the UK and broaden our distribution strategy in Europe following the acquisition of Canvas.
Personal investing
Personal investing is a recent focus for LGIM, as financial responsibility shifts from institution to individual and trends indicate customers are increasingly going direct. The personal investing business currently has AUM of GBP5.7bn (H1 2017 GBP5.4bn), including GBP2.0bn of legacy Banks and Building Society customers.
Breadth of investment management solutions
Asset movements
GBPbn Index Global fixed Real Active Total
funds income Solutions assets equities AUM
At 1 January 2018 340.9 148.8 462.7 23.8 7.1 983.3
Canvas Acquisition 2.4 - - - - 2.4
External inflows 22.4 8.7 18.2 0.6 0.5 50.4
---------
External outflows (41.2) (2.2) (8.7) (0.5) (0.1) (52.7)
Overlay net flows - - 16.7 - - 16.7
ETF net flows 0.2 - - - - 0.2
External net flows (18.6) 6.5 26.2 0.1 0.4 14.6
Internal net flows (0.3) (2.5) (0.3) 0.6 (0.1) (2.6)
Total net flows (18.9) 4.0 25.9 0.7 0.3 12.0
Cash management movements - 1.0 - - - 1.0
Market and other movements 1.9 (1.4) (14.9) 0.8 (0.3) (13.9)
============================= ====== ============ ========== ======= ========= ======
At 30 June 2018 326.3 152.4 473.7 25.3 7.1 984.8
Total AUM increased 4% to GBP984.8bn (H1 2017: GBP951.1bn), with external net inflows of GBP14.6bn (H1 2017: GBP21.7bn) driven by strong flows from our DC and US businesses as we continue to broaden our capabilities across client channels and regions. These were partially offset by UK DB net outflows of GBP0.3bn. We delivered consistent strong performance for our active clients, with the majority of funds outperforming their respective benchmarks over one and three years.
Solutions external net inflows were GBP26.2bn (H1 2017: GBP20.4bn), driven by DB pension schemes implementing a broad range of liability driven investment (LDI) strategies and high demand for multi-asset strategies from DC schemes and retail customers. External net inflows into multi-asset funds were GBP4.3bn (H1 2017: GBP3.1bn). Our private credit areas have also experienced strong growth.
Index external net outflows were GBP18.6bn (H1 2017: GBP4.3bn outflow), driven by UK DB clients implementing de-risking strategies together with the expected loss of GBP6bn of assets from one local government pension scheme. We expect to see continued index outflows from our DB clients as they transition into our LDI strategies. Outflows from the UK index business were partially offset by net inflows from US, Asian and retail clients.
Net external inflows into Global Fixed Income of GBP6.5bn (H1 2017: GBP5.3bn) were driven by continued strong performance across our range of funds. There has been robust demand for credit strategies from US, while UK clients increased their fixed income allocations as they de-risked their portfolios.
The Real Assets business has continued to expand, with good growth in private credit. LGIM originated GBP0.7bn of investments across corporate and infrastructure debt and real estate lending in H1 2018 and saw continued success with its Build to Rent business. Real Assets AUM has grown to GBP25.3bn (H1 2017: GBP21.2bn).
Legal & General Capital
FINANCIAL HIGHLIGHTS GBPm H1 2018 H1 2017
Net release from operations 138 119
Operating profit from:
Direct investment 104 69
Traded investment portfolio 64 73
Treasury assets 4 -
Total operating profit 172 142
Investment and other variances (90) 52
================================================== ==== ============== ========
Profit before tax attributable to equity holders 82 194
DIRECT INVESTMENT PORTFOLIO(1) GBPm
Housing 1,050 416
Urban Regeneration 477 608
Clean Energy 112 123
SME Finance 366 201
2,005 1,348
TRADED PORTFOLIO GBPm
Equities 1,631 2,047
Fixed income 219 308
Multi-asset 126 140
Cash(2) 2,690 1,443
4,666 3,938
LGC investment portfolio 6,671 5,286
Treasury assets at holding company 1,407 1,504
======================================================== ====== =================
Total 8,078 6,790
======================================================== ====== =================
1. Direct Investment portfolio includes an LGC asset valued at GBP128m which is classified as held for sale in line with IFRS 5 Non-current Assets Held for Sale and Discontinued operations.
2. Includes short term liquid holdings and proceeds from the Mature Savings sale.
Total operating profit up 21% to GBP172M
LGC operating profit was GBP172m, a 21% increase from the previous year (H1 2017: GBP142m), led by a strong performance from the direct investments portfolio. Overall the direct investment operating profit increased by 51% (H1 2018: GBP104m, H1 2017: GBP69m), benefitting from the CALA Homes acquisition as well as good performance from the existing assets.
Direct investment profit before tax was up 51% to GBP80m (H1 2017: GBP53m), representing a net portfolio return of 9.1% (H1 2017: 8.6%). The traded investment portfolio, including treasury assets, delivered profit before tax of GBP2m (H1 2017: GBP141m).
Direct investment portfolio up 49% to GBP2.0bn
The LGC direct investment portfolio grew to GBP2,005m, an increase of 49% (H1 2017: GBP1,348m). We invested or committed GBP708m in the period(18) , strengthening our presence in UK Housing through the acquisition of CALA Homes and launching an Affordable Housing business in April 2018. Further investment has also been made into Build to Rent schemes and development of our regeneration projects across the UK. We have continued our strategy of recycling capital by crystallising gains from the disposal of further developed assets and investing the proceeds into new opportunities across our target sectors. We have a pipeline for the disposal of further developed assets in H2 2018. Central to our future growth is the extension of a UK wide housing platform and support of Legal & General's Real Asset strategy, investing in the future of UK cities.
18. Up to June 2018.
Strengthening our UK Housing platform
Housing assets increased to GBP1,050m (H1 2017: GBP416m)
LGC has continued to expand its housing sector investments and capabilities, developing operating businesses to deliver a multi-tenure housing offering.
In March 2018, we attained full ownership of CALA Homes by purchasing the remaining 52.1% stake for GBP315m. Our stake in CALA Homes has made a significant contribution to LGC profit in H1 2018. In its financial year to June 2018, CALA Homes delivered another consecutive year of strong growth with revenues up 14% to GBP850m (year to 30 June 2017: GBP748m) and a significant number of home completions, up 29% to 2,171 (year to 30 June 2017: 1,677). Growth prospects remain strong. There is a healthy level of forward private reservations providing good visibility for the remainder of the financial year, which is being extended to December 2018 to align with Legal & General. The business is well positioned to achieve its long--term target of building c.3,000 homes per annum(19) , underpinned by a strong land pipeline, established market position and product offering. All of the required infrastructure is in place to deliver on this ambition, with few additional staff needed.
LGC also launched its affordable housing arm in April 2018, to address the overwhelming need for affordable housing across the UK. There are more than 1.3 million households on UK waiting lists with new additions to the housing stock averaging only 30,000 properties a year over the last 10 years(20) . LGC's Affordable Homes business aims to be fully operational and delivering 3,000 homes per year within the next four years.
Across LGC's other housing businesses, Legal & General Homes Communities and our Later Living business, we have continued to make land acquisitions to support future growth. At our first Communities site at Crowthorne, we have taken our first orders and we now have our first modular homes on site. In our Later Living business we have active development at 6 sites across the UK and have acquired a further site where we expect construction to commence later this year.
Investing in the future of UK cities
Our focus on sectors where there has been a shortage of investment and innovation has led us to Urban Regeneration and Clean Energy. We are investing in UK cities through the creation of Real Assets and Clean Energy investments which generate stable returns for shareholders, attractive Matching Adjustment eligible assets for LGR, and desirable assets for LGIM clients.
We have committed a further GBP50m to our Build-to-Rent joint venture with PGGM and LGIM Real Assets, which has acquired a new site in Woolwich, the largest site to date, and forward funded a new development in Croydon. This brings our total Build-to-Rent pipeline to 3,000 homes across nine schemes nationwide, more than double our pipeline in H1 2017 (H1 2017: 1,400 homes). LGC aims to have 6,000 homes in planning, development or operation by the end of 2019.
The Urban Regeneration business continues to mature with valuations increasing as projects are developed and units are let across the portfolio. For example, LGC has forward-sold a 100,000 square foot office building that has been pre-let to the Newcastle Council for a term of 40 years to LGR in March 2018. This is an attractive Matching Adjustment eligible asset LGR can use to back its annuity liabilities.
In Clean Energy, LGC's sector partner, NTR(21) , now has 9 of 12 sites in operation in its EUR246m UK and Ireland onshore wind fund and NTR is in advanced stages of the development of its second fund.
Funding innovation
LGC continues to play an active role investing in SME and early stage enterprises in the UK and Europe. LGC has committed an additional GBP22m to vehicles investing in early stage start-ups, taking total commitments to GBP101m.
Our Pemberton funds also continue to perform strongly and Pemberton(22) are approaching EUR3bn committed AUM across all its funds. Deployment of capital is progressing well, with Euro Fund I almost fully-deployed. LGC increased its commitment to Euro Fund II to EUR189m from EUR90m, which is now 47% drawn having secured attractive investment opportunities within the European direct lending market. LGC's initial commitment in the UK Sterling Fund of GBP50m is now 40% deployed across 11 loans.
19. By 2021.
20. Data as at April 2018.
21. LGC owned a 25% share in NTR fund management business and 47.5% in the NTR fund as at 30 June 2018.
22. LGC owned a 40% share in Pemberton as at 30 June 2018.
Legal & General Insurance
FINANCIAL HIGHLIGHTS GBPm H1 2018 H1 2017
Release from operations 165 166
New business surplus (8) 3
Net release from continuing
operations(1) 157 169
Operating profit from continuing
operations(1) 154 147
* UK 136 90
* US (LGIA) 18 57
Investment and other variances(2,3) (37) (3)
====================================== ======= ========
Profit before tax attributable
to equity holders 117 144
====================================== ======= ========
LGI new business annual premiums(4) 163 153
UK Retail Protection gross
premiums 633 609
UK Group Protection gross premiums 223 224
US Protection (LGIA) gross
premiums 461 491
Total gross premiums(4) 1,317 1,324
1. Excludes Legal & General Netherlands (LGN) which was sold on 6 April 2017. In H1 2017, LGN contributed GBP nil to net release from operations, and GBP4m to operating profit.
2. Investment variance is driven by two components: (a) a change in the market value of the underlying assets and liabilities backing term reserves in the US; and (b) a flattening of UK government bond yields which has resulted in a reduction in the discount rate used to calculate the reserves for our UK protection liabilities.
3. Prior year investment variance excludes a GBP11m gain related to LGN (including the gain from the disposal).
4. Excludes H1 2017 GBP1m new business annual premiums and GBP14m gross premiums in LGN.
3% growth in gross written premium(23)
In H1 2018, LGI gross written premium grew by 3%, assuming constant FX rates (H1 2018: GBP1,360, H1 2017: GBP1,324m), demonstrating good new business performance. Using actual FX rates, gross written premiums were broadly flat at GBP1,317m (H1 2017: GBP1,324m).
UK Retail Protection gross premium income increased 4% to GBP633m (H1 2017: GBP609m) with new business annual premiums of GBP87m (H1 2017: GBP86m). We remain a leading provider of Retail Protection in the UK, delivering straight through processing for more than 80% of our customers. Our direct distribution channel continues to perform strongly and delivered Retail Protection new business APE of GBP17m (H1 2017: GBP16m) accounting for 20% of our total Retail Protection new business APE. Group Protection increased new business by 21% to GBP34m (H1 2017: GBP28m) and gross premium income was broadly flat at GBP223m (H1 2017: GBP224m) reflecting the non-renewal of specific schemes which have experienced significantly higher claims than expected.
LGIA gross premium income increased 3% (down 6% on a sterling basis) to $635m (H1 2017: $618m) driven by new annual premiums increasing 21% to $58m (H1 2017: $48m). LGIA is the second largest provider of US term life assurance through the brokerage channel.
Legal & General Mortgage Club facilitated GBP35bn of mortgages in H1 2018 (H1 2017: GBP29bn) through strong partnerships with top lenders and over 9,000 mortgage brokers. As the largest participant in the intermediated mortgage market in the UK, we are involved in one in five of all UK mortgage transactions. Legal & General Surveying Services delivered a strong performance, completing about 266,000 surveys and valuations.
23. Constant FX rate comparisons have been calculated by applying the average FX rates for H1 2017 to both H1 2017 and H1 2018 local currency results. Actual FX rate comparisons apply the H1 17 and H1 18 average FX rates to the equivalent periods' results respectively.
UK: Profit up 51%, Group Protection turnaround on track
In H1 2018, LGI UK delivered a GBP136m profit (H1 2017: GBP90m), up 51% on the prior year, following some one-off model enhancements and the return to profitability in Group Protection where claims experience has improved following management actions.
Net release from operations decreased by GBP9m to GBP80m (H1 2017: GBP89m), with new business strain of GBP(8)m (H1 2017: GBP3m) reflecting higher Group Protection new business, changes in product mix and lower product margins in the competitive UK Retail Protection marketplace.
UK protection sales delivered a 7.1% Solvency II new business margin (H1 2017: 9.1%), reflecting product mix changes and the impact of competitive pressures in the retail protection market. The protection business continues to generate Solvency II surplus immediately when written.
US: Profits impacted by adverse mortality
LGIA operating profit decreased by $48m to $24m (H1 2017: $72m), primarily due to claims in H1 2018 being slightly higher than expected in contrast to prior year H1 favourable mortality experience. The unfavourable experience in H1 2018 is consistent with wider experience in the US life sector following elevated cases of flu in H1 2018.
LGIA net release from operations increased by 5% (down 4% on a sterling basis) to $105m (H1 2017: $100m). This represents the annual dividend paid by LGIA to the Group in March 2018.
US protection sales delivered a strong Solvency II new business margin of 11.6% (H1 2017:12.8%).
In order to align with other Legal & General subsidiaries, LGIA has elected a voluntary accounting policy change to its reserving methodology for term life insurance. Previously, our US GAAP reserving was based on locked-in assumptions, however, the new approach will incorporate updated assumptions. We expect the US business to continue to grow in the coming years, rebased on the H1 2018 performance.
Fintech: Salary Finance expansion and mortgage market transformation
We see increasing opportunities for technological innovation to help customers engage with financial services. To pursue these growth opportunities we established a Fintech business area within LGI that includes our existing business, Investment Discounts Online (IDOL), and other start-ups, that we fund and collaborate with.
LGI's investment in SalaryFinance, a Fintech business providing a financial well-being platform to employees, continues to perform strongly. At the end of June 2018 SalaryFinance had over half a million employees on its platform in the UK, a fivefold increase in the last twelve months. SalaryFinance will further enhance its growth potential by entering the US market in H2 2018 and by expanding the products available on the platform.
In July 2018, the Fintech business made a GBP3m strategic investment into Smartr365, a digital B2B mortgage broking platform. We will be working with Smartr365 to scale up the business and innovate using technology to enable mortgage brokers to become much more efficient and provide better customer service.
The Fintech business is also collaborating with our leading surveying business to enhance the services it offers to the mortgage market.
General Insurance
FINANCIAL HIGHLIGHTS GBPm H1 2018 H1 2017
Net release from operations (5) 12
Experience variances, assumption changes, tax
and non-cash movements (1) 3
Operating profit (6) 15
Operating profit excluding freeze event 22 15
Investment and other variances (8) 6
====================================================== ======= ========
Profit before tax (14) 21
====================================================== ======= ========
General Insurance gross premiums 193 173
Combined operating ratio (%) 107 95
Combined operating ratio excluding freeze event
(%) 92 95
====================================================== ======= ========
12% growth in gross premiums to GBP193m
Gross premiums increased 12% to GBP193m (H1 2017: GBP173m). This includes GBP12m from our pet insurance business, a 65% increase compared to H1 2017. The Buddies business, which was acquired in January 2018, is now operating as an integral part of the General Insurance division. Our direct business delivered gross premiums of GBP71m in H1 2018, representing 12% growth on H1 2017 and now accounts for 37% of gross premiums (H1 2017: GBP63m, 36% of gross premiums).
Operating profit in H1 2018 was GBP(6)m (H1 2017: GBP15m) with a combined operating ratio of 107% (H1 2017: 95%). In line with market experience, adverse weather experience caused by the February/March 2018 freeze has had a negative impact on operating profit of c.GBP28m. Excluding this freeze event, operating profit was GBP22m (H1 2017: GBP15m), and the combined operating ratio was 92% (H1 2017: 95%).
Delivering on new distribution agreements
The General Insurance business has had eight distribution agreements with major UK financial institutions go live since 2016, two of which went live in H1 2018. The distribution agreement with The Co-operative Bank went into effect in May 2018 and the agreement with Pen Underwriting went into effect in April 2018.
We continue to attract significant interest from potential distribution partners, who value our market leading, digital SmartQuote and SmartClaim propositions. We are actively discussing a number of new opportunities including the very latest in Insurtech.
Continuing digital innovation
Our SmartQuote solution using technology and big data for producing household insurance quotes in approximately ninety seconds after asking only five questions is being used in our direct and distribution partner channels. This has created a strong pipeline of opportunities, including the recent win with The Co-operative Bank.
In H1 2018 we expanded our award-winning(24) SmartClaim system which makes the claim filing process easy and fast for customers, leading to a Net Promoter Score of 80 in the most recent analysis. SmartClaim has reduced claims processing times resulting in increased operational efficiency and improved fraud detection for General Insurance. We are delighted that Legal & General's SmartClaim was the winner of the Insurance Times Claims Technology Solution of the Year award in May 2018.
We were also awarded Home Insurance Provider of the year at the 2018 Consumer Moneyfacts Awards, a further endorsement of our digital and customer led proposition.
24. 2018 Digital Claims Solutions Award
Disposed operations
The Group announced the sale of the Mature Savings business to Swiss Re on 6 December 2017 for GBP650m. The proceeds were received by the Group at the start of January 2018. The sale is expected to generate a one-off IFRS gain on completion of the Part VII transfer in 2019 of over GBP400m, and c.GBP50m operating profit per annum prior to that from the unwind of the expected underlying profits. Additionally in H1 2018 there was a one-off release of a GBP33m provision, which is no longer required following the transaction. As we set out during Full Year results, for H1 2018 we have reflected the impact of the Risk Transfer Agreement in our Internal Model which has given a small improvement in the capital position. The completion of the Part VII is expected to improve the Group's Solvency II coverage ratio by a further c.2%.
On 1 June 2018, the Group agreed the sale of our stake in IndiaFirst Life Insurance Company to an affiliate of Warburg Pincus LLC for INR 7.1bn (c.GBP79m at GBP:INR 1:90) resulting in a pre-tax profit of approximately GBP45m on completion, which is expected by end of 2018. The disposal will also result in a marginal improvement in the Solvency II coverage ratio.
Borrowings
The Group's outstanding core borrowings total GBP3.5bn at 30 June 2018 (FY 2017: GBP3.5bn). There is also a further GBP1.0bn (FY 2017: GBP0.5bn) of operational borrowings including GBP0.3bn (FY 2017: GBP0.1bn) of non-recourse borrowings.
Group debt costs of GBP97m (H1 2017: GBP92m) reflect an average cost of debt of 5.0% per annum (H1 2017: 5.0% per annum) on average nominal value of debt balances of GBP3.9bn (H1 2017: GBP3.7bn).
Taxation
Equity holders' Effective Tax Rate (%) H1 2018 H1 2017 Equity holders' total Effective Tax Rate(25) 17.8 18.1 Annualised rate of UK corporation tax 19.0 19.25 =============================================== ======== ========
In H1 2018, the Group's effective tax rate was below the UK corporation tax rate. This is driven by the impact of overseas tax rates and one-off adjustments.
25. Equity holders' total Effective Tax Rate is shown for continuing operations. The equity holders' total Effective Tax Rate including discontinuing operations is 18.0% (H1 2017 18.1%).
Solvency II
As at 30 June 2018, the Group had an estimated Solvency II surplus of GBP6.9bn over its Solvency Capital Requirement, corresponding to a Solvency II coverage ratio of 193% on a shareholder basis.
Capital (GBPbn) H1 2018(1) FY 2017(1) Own Funds 14.3 14.6 Solvency Capital Requirement (SCR) (7.4) (7.7) Solvency II surplus 6.9 6.9 SCR coverage ratio (%) 193 189
1. Solvency II position on a shareholder basis and before the accrual of the relevant dividend.
Analysis of movement from 1 January 2018 Solvency to 30 June 2018 (GBPbn) II surplus Surplus arising from back-book (including release of SCR) 0.7 Release of Risk Margin(2) 0.2 Amortisation of TMTP(3) (0.2) ========================================================================== ============= Operational surplus generation 0.7 New business strain (0.1) ========================================================================== ============= Net surplus generation 0.6 Dividends paid - 2017 final dividend (0.7) Operating variances - Mergers, acquisitions and disposals(4) - Market movements 0.1 Subordinated debt - ========================================================================== ============= Total surplus movement (after dividends - paid in the year) 2. Based on the Risk Margin in force at end 2017 and does not include the release of any Risk Margin added by new business written in 2018 3. TMTP amortisation based on a linear run down of the end-2017 TMTP of GBP5.3bn net of tax (GBP6.2bn before tax) 4. Mergers, acquisitions and disposals include the impact of the sale of Mature Savings (in excess of the amount which recognised in 2017) and purchase of 100% of CALA Homes
The total increase in surplus reflects the operational surplus generated over the first six months of 2018 net of new business strain and the GBP0.7bn of the 2017 final dividend paid. Operational surplus generation was up 11%(26) to GBP0.7bn (H1 2017: GBP0.6bn), after allowing for amortisation of the opening Transitional Measures on Technical Provisions (TMTP). New business strain was GBP0.1bn. Consistent with H1 2017, the majority of this strain was in respect of our US term protection sales, which we reinsure and finance in H2, significantly reducing the eventual impact.
Operating variances include the impact of experience variances, changes to valuation and capital calibration assumptions, and other management actions. These actions include changes in asset mix, matching adjustment optimisation, and hedging strategies. The net impact of operating variances over the period was GBP nil.
The above incorporates management's estimate of the impact of recalculating the TMTP as at 30 June 2018 as we believe this provides the most up to date and meaningful view of our Solvency II position. In line with UK regulatory requirements, a formal recalculation of the Group's TMTP will take place no later than 31 December 2019.
When stated on a proforma basis, including the SCR attributable to our With-profits fund and the final salary pension schemes of GBP0.8bn in both the Group's Own Funds and the SCR, the Group's coverage ratio was 186% (H1 2017: 180%).
26. Using unrounded operational surplus generation values.
Reconciliation of IFRS net release from operations to Solvency II net surplus generation
The table below gives a reconciliation of the Group's IFRS Release from operations and Solvency II Operational surplus generation in H1 2018:
GBPbn
IFRS Release from operations 0.7
Expected release of IFRS prudential margins (0.2)
Release of IFRS specific reserves (0.1)
Solvency II investment margin 0.1
Release of Solvency II Capital Requirement and Risk Margin less
TMTP amortisation 0.2
Other Solvency II items and presentational differences -
Solvency II Operational surplus generation 0.7
The table below gives a reconciliation of the Group's IFRS New business surplus to Solvency II New business strain in H1 2018:
GBPbn
IFRS New business surplus -
Removal of requirement to set up prudential margins above -
best estimate on new business
Set up of Solvency II Capital Requirement on new business (0.1)
Set up of Risk Margin on new business -
Solvency II New business strain (0.1)
Sensitivity analysis
Impact on net Impact on
of tax Solvency net of tax
II capital surplus Solvency
H1 2018 II coverage
GBPbn ratio H1
2018
%
Credit spreads widen by 100bps assuming
an escalating addition to ratings(1) 0.4 12
Credit migration(2) (0.5) (7)
15% fall in property markets (0.5) (6)
100bps increase in risk free rates 0.8 22
50bps decrease in risk free rates (0.5) (11)
1. Applies to all assets within Legal & General's holdings where the capital treatment depends on a credit rating (e.g. corporate bonds and Sale & Leaseback rental strips), with no change in the firm's long term default expectations.
2. Credit migration stress covers the cost of an immediate big letter downgrade on 20% of all assets where the capital treatment depends on a credit rating (including corporate bonds and Sale & Leaseback rental strips).
The above sensitivity analysis does not reflect all management actions which could be taken to reduce the impacts. In practice, the Group actively manages its asset and liability positions to respond to market movements. These results all allow (on an approximate basis) for the recalculation of TMTP as at 30 June 2018, where the impact of the stress would cause it to change materially.
The impacts of these stresses are not linear therefore these results should not be used to interpolate or extrapolate the impact of a smaller or larger stress. The results of these tests are indicative of the market conditions prevailing at the balance sheet date. The results would be different if performed at an alternative reporting date.
Solvency II new business contribution
Management estimates of the value of new business and the margin as at 30 June 2018 are shown below:
Contribution from
PVNBP new business Margin
%
LGR(1) (GBPm) 844 65 7.7
UK Protection Total (GBPm) 788 56 7.1
- Retail protection 652 49 7.6
- Group protection 136 7 5.2
US Protection (GBPm) 411 48 11.6
1. UK annuity business.
As in previous years the reported LGR margin includes all of LGR's new business costs including those incurred in quoting on business we expect to conclude in H2 and beyond. By only including the costs associated with the business written in H1 the margin increases to 10.3%. This level is not representative of our expected full year margins, given the relatively small number of PRT deals written in H1.
The key economic assumptions as at 30 June 2018 are as follows:
Margin for risk 3.1% Risk free rate - UK 1.7% - US 2.8% Risk discount rate (net of tax) - UK 4.8% - US 5.9% Long term rate of return on non-profit annuities in LGR 3.0%
Methodologies and the approach to setting assumptions that would have a material impact on the margin for these contracts are unchanged from those used for the European Embedded Value reporting at end 2015. The cost of currency hedging is updated at each reporting date to reflect current market conditions, and hedging activity in light of Solvency II.
Principal risks and uncertainties
Legal & General runs a portfolio of risk taking businesses; we accept risk in the normal course of business and aim to deliver sustainable returns on risk based capital to our investors in excess of our cost of capital. We manage the portfolio of risk that we accept to build a sustainable franchise for the interests of all our stakeholders; we do not aim to eliminate that risk. We have an appetite for risks that we understand deeply and are rewarded for, and which are consistent with delivery of our strategic objectives. Risk management is embedded within the business. The Group's Principal Risks and Uncertainties summarise key matters that may impact the delivery of Group's strategy earnings or profitability.
RISKS AND UNCERTAINTIES TR, OUTLOOK AND MITIGATION
Reserves and our assessment of capital We undertake significant analysis
requirements may require revision of the variables associated with writing
as a result of changes in experience, long-term insurance business to ensure
regulation or legislation that a suitable premium is charged
The writing of long-term insurance for the risks we take on, and that
business requires the setting of reserves continue to remain appropriate
assumptions for long-term trends for factors including mortality, lapse
in factors such as mortality, lapse rates, valuation interest rates, expenses
rates, valuation interest rates, and credit defaults. We remain, however,
expenses and credit defaults. Actual inherently exposed to certain extreme
experience may require recalibration events which could require us to adjust
of these assumptions, impacting our reserves. For example, in our
profitability. Management estimates pensions risk transfer and annuities
are also required in the derivation business, while trend data suggests
of Solvency II capital metrics. the rate of longevity improvement
These include modelling simplifications may be slowing, a dramatic advance
to reflect that it is not possible in medical science beyond that anticipated
to perfectly model the external may lead to an unexpected change in
environment, with adjustment necessitated life expectancy, requiring adjustment
where new data emerges. Forced changes to reserves. In our protection businesses,
in reserves can also arise from a widespread increase in mortality/morbidity
regulatory or legislative intervention may also require us to re-evaluate
impacting capital requirements and reserves. We are also exposed to lapse
profitability. risks if our US term policies are
not continued in line with our renewal
assumptions. We remain focused on
continuously developing our understanding
of longevity and to evolve and develop
our underwriting capabilities for
our protection business. Our selective
use of reinsurance also acts to reduce
the impacts of significant variations
in life expectancy and mortality.
Investment market performance and Whilst the global economy continues
conditions in the broader economy to see relatively robust levels of
may adversely impact earnings, profitability growth, we are closely monitoring
or surplus capital a range of risk factors that have
The performance and liquidity of led over the last six months to a
investment markets, interest rate period of financial market volatility
movements and inflation impact the and which could trigger a broader
value of investments we hold in reappraisal of asset values. These
shareholders' funds and those to factors include the effects of a tightening
meet the obligations from insurance in central bank monetary policies
business, with the movement in certain and geo-political risks such as a
investments directly impacting profitability. developing trade war between the US
Interest rate movements and inflation and China. Within the UK, much uncertainty
can also change the value of our remains on the outcome of negotiations
obligations. We use a range of techniques on a future trading relationship with
to manage mismatches between assets the EU and the post "Brexit" economy,
and liabilities. However, loss can with the risk of significant financial
still arise from adverse markets. market volatility if a potential deal
Interest rate expectations leading were to emerge only very close to,
to falls in the risk free yield or shortly after, the UK's formal
curve can also create a greater departure date. Although we cannot
degree of inherent volatility to fully eliminate the downside impacts
be managed in the Solvency II balance from these and other risk factors
sheet, than the underlying economic on our earnings, profitability or
position would dictate, potentially surplus capital, as part of our on-going
impacting capital requirements and business planning activity we continue
surplus capital. In addition, significant to model a broad range of economic
falls in investment values can reduce and financial market scenarios so
fee income to our investment management as to ensure our strategies will remain
business. resilient in projected conditions.
RISKS AND UNCERTAINTIES TR, OUTLOOK AND MITIGATION
In dealing with issuers of debt and We continue to actively manage our
other types of counterparty the group exposure to default risks within our
is exposed to the risk of financial bond portfolios, setting selection
loss criteria and exposure limits, and using
Systemic corporate sector failures, the capabilities of LGIM's global credit
or a major sovereign debt event, team to ensure the risks are effectively
could, in extreme scenarios, trigger controlled, and if appropriate trading
defaults impacting the value of our out to improve credit quality. We are
bond portfolios. Under Solvency II, closely monitoring a number of factors
a widespread widening of credit spreads that may lead to a widening of credit
and downgrades can also result in spreads including the outlook for interest
a reduction in our Solvency II balance rates; and the potential economic impacts
sheet surplus, despite already setting of an unfavourable "Brexit" outcome
aside significant capital for credit for specific industrial and service
risk. Default risk also arises where sectors. We also remain vigilant to
we undertake property lending, with other risk scenarios including a material
exposure to loss if an accrued debt deterioration in global economic conditions;
exceeds the value of security taken. a renewed banking crisis; and default
We are also exposed to default risks on debt linked to emerging markets.
in dealing with banking, money market Within our property lending businesses,
and reinsurance counterparties, as our underwriting criteria take account
well as settlement, custody and other of both the default risk of the borrower
bespoke business services. A default and the wider outlook for the different
by a counterparty could expose us segments of the property markets in
to both financial loss and operational which we operate, recognising for example
disruption of business processes. that recent housing data may be indicative
of slowing market confidence.
Changes in regulation or legislation Regulatory driven change remains a
may have a detrimental effect on significant factor across our businesses.
our strategy We continue to progress our responses
Legislation and government fiscal to EU driven financial services regulation
policy influence our product design, including the IDD, and implement the
the period of retention of products requirements of the UK senior manager
and required reserves for future insurance regime. As a predominantly
liabilities. Regulation defines the UK and US focused business, UK's withdrawal
overall framework for the design, from the EU does not have a material
marketing, taxation and distribution operational impact for our businesses.
of our products; and the prudential Much uncertainty remains, however,
capital that we hold. Significant on the extent to which EU regulation
changes in legislation or regulation may permit on-going servicing of UK
may increase our cost base, reduce written annuity and protection business
our future revenues and impact profitability where customers have subsequently moved
or require us to hold more capital. to the EU. We are establishing businesses
The prominence of the risk increases in Dublin to support our European institutional
where change is implemented without investment clients and are investigating
prior engagement with the sector. mitigating options to enable the future
The nature of long-term business servicing of EU based retail insurance
can also result in some changes in customers. Our internal control framework
regulation, and the re-interpretation seeks to ensure on-going compliance
of regulation over time, having a with relevant legislation and regulation.
retrospective effect on in-force We cannot, however, completely eliminate
books of business, impacting future the risks that controls may fail or
cash generation. that historic accepted practices may
be reappraised by regulators, resulting
in sanction against the group.
New entrants may disrupt the landscape Whilst strong competition exists in
of the markets in which we operate a number of our markets including retail
As has been seen in other business protection and pension risk transfer
sectors, it is possible that alternative business, we remain selective in the
digitally enabled providers of financial pricing of risk and continue to develop
services products emerge with lower our product offerings to meet our customers'
cost business models or innovative needs. We continue to focus on developing
service propositions and capital our digital capabilities including
structures disrupting the current My Account that enables more than 1.5
competitive landscape. million customers to manage their investments
online; our SmartQuote app for household
insurance; and technology to transform
our insurance product distribution
reach in the US.
============================================== ================================================
A material failure in our business Our plans for growth and the digitalisation
processes or IT security may result of our businesses, together with the
in unanticipated financial loss or regulatory change agenda, inherently
reputation damage increase the profile of operational
We have constructed our framework risks across our businesses. We continue
of internal controls to minimise to invest in our system capabilities,
the risk of unanticipated financial including those for the management
loss or damage to our reputation. of cyber risks, to ensure that our
However, no system of internal control business processes are resilient, and
can completely eliminate the risk that appropriate recovery plans are
of error, financial loss, fraudulent in place. As we develop our housing
actions or reputational damage. We businesses we are also increasing our
are also inherently exposed to the exposure to property construction and
risk that third parties may seek safety risks, together with risk associated
to disrupt our online business operations, with operating properties in the affordable
steal customer data or perpetrate homes and retirement sectors, which
acts of fraud using digital media. we seek to closely manage through robust
internal control systems, including
training, monitoring and independent
assessments.
============================================== ================================================
Notes
A copy of this announcement can be found in "Results, Reports and Presentations", under the "Investors" section of our shareholder website at https://www.legalandgeneralgroup.com/investors/results-reports-and-presentations/
A presentation to analysts and fund managers will take place at 9.30am UK time today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of the presentation which can be accessed at https://www.legalandgeneralgroup.com/investors/half-year-results-2018/ A replay will be available on this website later today.
There will be a live, listen only, teleconference link to the presentation. Details below:
Participant dial-in numbers Location you are dialling in from Number you should dial United Kingdom 020 3936 2999 =================================== ====================== United States (toll free) +1 855 979 6654 All other locations +44 20 3936 2999
Please enter access code 349372 to gain access to the conference.
2018 Financial Calendar Date
Ex-dividend date (2018 interim dividend) 16 August 2018
Record date 17 August 2018
Last day for DRIP elections 6 September
2018
Payment date of 2018 interim dividend 27 September
2018
Definitions
Definitions are included in the Glossary on pages 99 to 104 of this release.
Forward looking statements
This announcement may contain certain forward-looking statements relating to Legal & General, its plans and its current goals and expectations relating to future financial condition, performance and results. By their nature, forward-looking statements involve uncertainty because they relate to future events and circumstances which are beyond Legal & General's control, including, among others, UK domestic and global economic and business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory and Governmental authorities, the impact of competition, the timing impact of these events and other uncertainties of future acquisitions or combinations within relevant industries. As a result, Legal & General's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in these forward-looking statements and persons reading this announcement should not place reliance on forward-looking statements. These forward-looking statements are made only as at the date on which such statements are made and Legal & General Group Plc does not undertake to update forward-looking statements contained in this announcement or any other forward-looking statement it may make.
Going concern statement
The Group's business activities, together with the factors likely to affect its future development, performance and position in the current economic climate are set out in this Interim Management Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Group Results. Principal risks and uncertainties are detailed on pages 18 to 20. In addition, the financial statements include, amongst other things, notes on the Group's objectives, policies and process for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities, and its exposures to credit and liquidity risk.
The Group manages and monitors its capital with various stresses built in order to understand the expected impact of market downturns. These stresses do not give rise to any material uncertainties over the ability of the Group to continue as a going concern and therefore, based upon the available information, the directors consider that the Group has the plans and resources to manage its business risks successfully as it has a diverse range of business and remains financially strong.
Having reassessed the principal risks, the directors considered it appropriate to adopt the going concern basis of accounting in preparing the interim financial information.
Director's responsibility statement
We confirm to the best of our knowledge that:
i. The consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;
ii. The interim management report includes a fair review of the information required by DTR 4.2.7, namely an indication of important events that have occurred during the first six months of the financial year and their impact on the consolidated interim financial statements, as well as a description of the principal risks and uncertainties faced by the company and the undertakings included in the consolidation taken as a whole for the remaining six months of the financial year;
iii. The interim management report includes, as required by DTR 4.2.8, a fair review of material related party transactions that have taken place in the first six months of the financial year and any material changes in the related party transactions described in the last Annual Report and Accounts; and
iv. The directors of Legal & General Group Plc are listed in the Legal & General Group Plc Annual Report and Accounts for 31 December 2017. A list of current directors is maintained on the Legal & General Group Plc website: legalandgeneralgroup.com.
By order of the Board
Nigel Wilson Stuart Jeffrey Davies
Group Chief Executive Group Chief Financial Officer
8 August 2018 8 August 2018
Enquiries
Investors
Sujee Rajah, Investor Relations & Strategy VP
+44 203 1242 047 / +1 312 964 3034
investor.relations@group.landg.com
legalandgeneralgroup.com
Alyssa Manning, Investor Relations Manager
+44 203 1242 047
investor.relations@group.landg.com
legalandgeneralgroup.com
Andrew McGeary, Investor Relations Analyst
+44 203 1242 095
investor.relations@group.landg.com
legalandgeneralgroup.com
Media
John Godfrey, Group Corporate Affairs Director
+44 203 1242 090
legalandgeneralgroup.com
Simon Pilkington, Tulchan Communications
+44 207 3534 200
Sheebani Chothani, Tulchan Communications
+44 207 3534 200
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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