REG - Legal & General Grp - L&G Half Year Results 2016 Part 1 <Origin Href="QuoteRef">LGEN.L</Origin> - Part 1

Legal & GeneralAnnouncement

09/08/2016 07:05

RNS Number : 5862G
Legal & General Group Plc
09 August 2016
Stock Exchange Release 
09 August 2016 
net cash generation up 16%, RoE1 of 20%, SII SURPLUS oF 5.3BN
financial highlights2: 
 Net cash GENERATION up 16% to 727m (h1 2015: 629m)
 adjusted OPERATING PROFIT3 up 10% to 822M (h1 2015: 750m) 
 Profit after tax UP 22% to 667m (h1 2015: 547m)
 Earnings per share up 24% to 11.27P (h1 2015: 9.11p)
 adjusted Earnings per share4 UP 14% to 11.20P (h1 2015: 9.79p)
 return on equity1 20.4% (h1 2015: 19.1%)
 SOLVENCY II SURPLUS OF 5.3BN (FY 2015: 5.5BN)
 SOLVENCY II COVERAGE RATIO OF 158%, (163% oN a SHAREHOLDER BASIS)
 new formulaic approach to setting the interim dividend: 30% of 2015 full year dividend at 4.00p per share
business highlights: 
 lgr ANNUITY ASSETS UP 18% AT 51.0BN (h1 2015: 43.4BN)
 GROUP-WIDE DIRECT INVESTMENT UP 28% AT 8.0BN (h1 2015: 6.2bn)
 LGIM AUM UP 18% AT 841.5BN (h1 2015: 714.6BN)
Nigel Wilson, Group Chief Executive, said:
"We have continued to execute our strategy well. Shareholders' profit before tax grew 23% to 826m, adjusted EPS grew 14% to 11.2p, net cash generation grew by 16% to 727m and the Group delivered a 20% RoE. We have a strong balance sheet, which gives us the flexibility and capacity to invest in support of each of our businesses.

There are many different views of the outlook for economic growth, the state of financial markets and political uncertainty. We reflect this in our approach to risk management. While we cannot be immune to this uncertainty, we remain confident that we will continue to deliver attractive returns for shareholders, great value to customers and better outcomes for society. Our five long-term growth drivers, ageing populations, globalisation of asset markets, creating real assets, welfare reform and digital remain unaffected and will continue to provide many growth opportunities."
1. Return on equity is calculated by taking annualised profit after tax attributable to equity holders of the Company (twice the half-year number), as an average of shareholders' equity during the period, excluding a 4m profit in relation to the disposal of Suffolk Life (H1 2015: 40m impairment loss in relation to the subsequent disposals of Legal & General France and Legal & General Gulf).
2. The metrics within the Group's financial highlights are defined in the glossary.
3. Adjusted operating profit is calculated as operating profit of 777m (H1 2015: 750m) before the cost of the provision in respect of the closure of our Kingswood office of 45m (H1 2015: nil).
4. Adjusted earnings per share is calculated by dividing profit after tax, excluding the 4m profit (H1 2015: 40m loss) described in note 1, by the weighted average number of ordinary shares in issue during the period. 
FINANCIAL SUMMARY
m
H1 2016
H1 2015
Growth %
Analysis of operating profit
Legal & General Retirement
406
281
44
Legal & General Investment Management
171
176
(3)
Legal & General Capital
135
115
17
Insurance
138
186
(26)
Savings
49
55
(11)
Legal & General America
43
40
8
Operating profit from divisions
942
853
10
Group debt costs
(86)
(75)
(15)
Group investment projects and expenses
(34)
(28)
(21)
Adjusted operating profit
822
750
10
Kingswood office closure provision
(45)
-
n/a
Operating profit
777
750
4
Investment and other variances (inc. minority interests)
49
(78)
n/a
Profit before tax attributable to equity holders
826
672
23
Operational cash generation
655
624
5
New business surplus
72
5
n/a
Net cash generation
727
629
16
LEGAL & GENERAL RETIREMENT (LGR)
m
H1 2016
H1 2015
Growth %
Annuity assets (bn)
51.0
43.4
18
 of which: direct investments (bn)
6.2
4.9
27
Annuity sales
3,788
1,326
186
Lifetime mortgage advances
231
37
524
LEGAL & GENERAL INVESTMENT MANAGEMENT (LGIM)
bn
H1 2016
H1 2015
Growth %
LGIM total AUM1, 2
841.5
714.6
18
LGIM total international AUM
151.9
115.8
31
External AUM net flows
9.6
13.8
(30)
Workplace AUA
17.3
13.1
32
LEGAL & GENERAL CAPITAL (LGC)
bn
H1 2016
H1 2015
Growth %
LGC assets
5.9
4.8
23
 of which: direct investments
1.1
0.8
37
INSURANCE
m
H1 2016
H1 2015
Growth %
UK Protection gross premiums
815
774
5
General insurance gross premiums
156
164
(5)
UK Protection new business annual premiums
118
119
(1)
SAVINGS
bn
H1 2016
H1 2015
Growth %
Savings AUA3
102.0
110.8
(8)
LEGAL & GENERAL AMERICA (LGA)
$m
H1 2016
H1 2015
Growth %
LGA gross premiums4
601
588
2
1. LGIM total AUM includes 244.0bn (H1 2015: 208.1bn) of derivative overlay assets associated with the Solutions business.
2. LGIM AUM includes 51.0bn (H1 2015: 43.4bn) managed on behalf of LGR and 31.5bn (H1 2015: 34.0bn) managed on behalf of Savings.
3. Savings AUA as at 30 June 2015 included 8.3bn in respect of Suffolk Life, a business which was disposed of in H1 2016, and 2.8bn in respect of Legal & General International (Ireland), a business which was disposed of in H2 2015.
4. LGA gross premiums excludes $65m (H1 2015: $nil) of US pension risk transfer business which is reported within LGR.
commentary on h1 financial performance
Income statement
Adjusted operating profit increased 10% to 822m (H1 2015: 750m). 
LGR delivered a 44% growth in operating profit, to 406m (H1 2015: 281m), driven by strong back book performance feeding through to operational cash generation of 205m (H1 2015: 171m) and strong front book activity generating new business surplus of 79m (H1 2015: 22m). Refinements to the valuation methodology for longevity swaps resulted in a 58m one off benefit to operating profit. Longevity experience in the period was also positive compared to our best estimate assumption.
LGIM operating profit fell by 3% to 171m (H1 2015: 176m). Management fee revenues were up 4% to 337m (H1 2015: 324m) but transactional revenues were lower at 16m (H1 2015: 23m), driven by fewer property transactions. The average monthly closing assets under management (AUM) for the six months was 784.1bn (H1 2015: 715.2bn). There was a significant appreciation in asset values towards the end of June, which increased the H1 2016 closing AUM to 841.5bn (H1 2015: 714.6bn).
Insurance operating profit fell by 48m to 138m (H1 2015: 186m) primarily as a consequence of a c.40m lower expected release from the UK Protection back book, adverse mortality experience of 18m (H1 2015: 5m positive), mainly in our Group Protection business, and the introduction of the annual Flood Re levy for our General Insurance business of 9m, the cost of which was expensed in H1 2016. H1 2015 operating profit also included 7m operating profit from Legal & General France, which was disposed of on 31st December 2015. These impacts were partially offset by improved new business surplus and a 31m positive assumption change following a review of the prudence held for renewal expenses. 
The LGC operating profit increased by 17% to 135m (H1 2015: 115m), driven by the operating businesses within our LGC direct investments portfolio, which delivered operating profits of 36m (H1 2015: 10m).
Operational cash generation increased 5% to 655m (H1 2015: 624m) 
Operational cash generation has increased broadly in line with the guidance we previously issued. LGR delivered a 34m increase in operational cash generation to 205m (H1 2015: 171m) resulting from a higher expected release following assessment of the prudence held within our reserves.
Net cash generation increased 16% to 727m (H1 2015: 629m) 
New business surplus increased to 72m (H1 2015: 5m). LGR delivered new business surplus of 79m (H1 2015: 22m) resulting from significantly higher annuity sales of 3.8bn (H1 2015: 1.3bn). Bulk annuity sales were 3.6bn including a 2.9bn back book annuity transaction with Aegon, for which we have retained the longevity risk. In H1 2016 we reinsured 444m of longevity risk in relation to new business.
Insurance delivered new business surplus of 7m (H1 2015: nil) reflecting higher levels of efficiency on an increasing premium base. Total UK Retail and Group protection premiums increased 5% to 815m (H1 2015: 774m).
Shareholders' profit before tax increased 23% to 826m (H1 2015: 672m), including Group investment variances of 58m (H1 2015: (29)m).
We manage our exposure to interest rate and foreign exchange at a legal entity and Group level. At a divisional level however, profit before tax has been impacted by reductions in interest rates and movements in foreign exchange. Specifically:
Insurance profit before tax reduced to 46m (H1 2015: 138m), with negative investment variance of (92)m (H1 2015: (48)m) following a c.1% reduction in UK government bond yields, impacting the discount rate used to calculate the reserves for our UK Protection liabilities; 
LGR profit before tax benefitted from a 63m (H1 2015: 11m) positive investment variance arising from active management of the assets in the annuity fund; and
LGC profit before tax benefitted from a positive investment variance of 60m (H1 2015: (4)m) primarily driven by foreign exchange gains, particularly on un-hedged US dollar denominated investments.
balance sheet
Capital
The Group's Solvency II surplus at the half year was estimated at 5.3bn, representing a coverage ratio of 158% (FY 2015: surplus of 5.5bn, coverage ratio of 169%). This is stated after recalculation of Transitional Measures for Technical Provisions.
Eligible own funds were 14.3bn (FY 2015: 13.5bn), the solvency capital requirement (SCR) was 9.0bn (FY 2015: 8.0bn) resulting in a surplus of 5.3bn (FY 2015: 5.5bn). 
Eligible own funds increased by 0.8bn reflecting surplus generated net of investment movements in H1 2016 and positive management actions offset by the payment of the 2015 final dividend of 592m. Management actions included removing eligibility restrictions on assets held in reassurance collateral accounts where the specific trust structure had made the surplus assets ineligible under the Solvency II rules,the treatment of which is awaiting regulatory approval. In addition we have reviewed the provision for specific items, including bulk purchase annuity data loading and Solvency II allowing for negative reserves. The SCR increased by 1.0bn from year-end 2015, largely driven by the fall in risk free rates.
On a shareholder basis, adjusting for the Own Funds and SCR of the With-profits fund, the Group's Solvency II coverage ratio was 163% with eligible own funds of 13.7bn and SCR of 8.4bn.
Overall, our Solvency II balance sheet has demonstrated its resilience to recent market volatility, including that caused by the market reaction to the EU Referendum outcome, just before 30th June 2016.
The Group remains focussed on delivering appropriate returns on the capital we choose to deploy. We estimate, using a Solvency II cost of capital, that LGR will deliver a 10.2% new business margin and our UK insurance business an 11.1% new business margin for the business we have written in H1 2016.
The Group's economic capital surplus was 8.1bn (FY 2015: 7.6bn), representing a coverage ratio of 235% (FY 2015: 230%).Eligible own funds was 14.0bn (FY 2015: 13.5bn) and the economic capital requirement was 5.9bn (FY 2015: 5.9bn).
Asset portfolio
Shareholder investment exposure arises mainly in the LGR and LGC investment portfolios. Our largest exposure within the shareholder investment portfolio is to credit assets.
Our global credit team keeps our portfolios under continuous review and in recent months has actively de-risked the credit component of Eligible Own Funds as well as LGR's 47.9bn 'A minus' rated bond portfolio. This has included selling sub-investment grade credit and reducing our exposure to European banks' subordinated debt. The portfolio is well diversified by sector and by geography. 
Elsewhere in the shareholder investment portfolio there is 2.5bn of property, of which 94% is fully let and a further 4% is property under development. The vast majority of the Group's property assets are held for their income characteristics as opposed to capital appreciation. 
DIVIDEND
The Board adopted a progressive dividend policy in March 2016 reflecting the Group's expected medium term underlying business growth, including net cash generation and operating earnings. There is no change to this dividend policy.
For this interim dividend and going forward the Board has decided to adopt a formulaic approach to setting the interim dividend, being 30% of the prior year full year dividend. We have therefore declared an interim dividend of 4.00p per share. 
outlook
The Group's strategy is aligned to, what we believe to be, five established long term growth drivers: ageing populations; globalisation of asset markets; creating real assets; welfare reform; and digital. There are a range of different views amongst market commentators regarding the potential impacts of the recent EU referendum result on the wider economy, and this in turn has created greater market volatility which, we expect to continue for some time. Although no business model can be immunised against slowing global economic activity, the opportunities available to the Group should remain largely unchanged and we will strive to execute our strategy successfully to deliver profitable growth.
International demand for pension risk transfer solutions remains strong and is expected to continue for many years. In the UK alone, we are currently quoting on over 13bn of buy-in and buy-out deals and over 16bn of longevity deals.We will remain disciplined in the deployment of our capital, selecting the opportunities that deliver the best return on capital across annuity and longevity transactions. Our self-manufacturing and wider asset management capabilities, together with deep understanding and management of longevity risk, mean we anticipate being able to provide effective solutions for our clients.
The lifetime mortgage market grew 24% in H1 2016 to 934m and is on track to exceed 2bn for the first time in 2016. We are targeting to write up to 500m of lifetime mortgages new business in 2016, which would represent approximately 25% of the market.
LGIM had a good first half against the backdrop of challenging investment markets, with 9.6bn of external net inflows. It is well positioned to handle the uncertain economic and political environment that lies ahead, and continuing fee pressure in asset management markets. LGIM is focused on serving its clients and providing innovative risk management solutions and thereby delivering growth and diversification in its chosen markets. 
LGC will invest further shareholder capital in housing; infrastructure and SME finance, where we expect there to be attractive returns. In the wider context, it also provides wider benefit to the Group with improved access to additional assets and fee earning opportunities. 
We intend to switch a larger proportion of assets within both LGR and LGC from traded assets to direct investments, with a medium term target of 15bn.
LEGAL & GENERAL RETIREMENT
FINANCIAL HIGHLIGHTS m
H1 2016
H12015
Operational cash generation
205
171
New business surplus
79
22
Net cash generation
284
193
Experience variances, assumption changes, tax and non-cash movements
122
88
Operating profit
406
281
Profit Before Tax
469
292
Back book acquisitions
2,944
-
UK bulk annuities
641
1,146
International bulk annuities
45
-
Individual annuity single premiums
158
180
Lifetime mortgage advances
231
37
Total LGR new business
4,019
1,363
Annuity net inflows (bn)
2.6
0.2
Total annuity assets (bn)
51.0
43.4
Longevity insurance gross premiums
161
164
record profits
LGR profitability increased on all measures. 
Operational cash generation increased to 205m (H1 2015: 171m), benefitting from increased releases of prudential margins as we continue to refine our assessment of best estimate reserves. 
Net cash generation increased to 284m (H1 2015: 193m) with new business surplus of 79m (H1 2015: 22m) reflecting higher levels of new business and a 10.2% new business margin on SII capital. The net cash generation benefited in particular from the Aegon back book acquisition, for which we have retained the longevity risk.
Operating profit increased to 406m (H1 2015: 281m) including a 58m one-off benefit from a change in treatment to historic longevity insurance deals where future fees in excess of prudent estimates of longevity and expense experience are now included as an offset to IFRS reserves. This is now consistent with the approach used for other product lines across the Group.
ONGOING credit and ASSET management
Credit portfolio management
LGR's 51.0bn asset portfolio backing its IFRS liabilities is well diversified. We hold 2.7bn of credit default reserves (2015: 2.2bn) against these assets. Within the 47.9bn bond portfolio, just over 2/3rds of the portfolio is A-rated or better (67%), 30% BBB-rated and 3% sub-investment grade. The bond portfolio has 4.7% in Banks, 4.7% in Oil & Gas and 3.9% in bonds in the property sector, illustrating the high degree of diversification in the portfolio.
Direct Investment
Our direct investment portfolio is secured through directly negotiated covenants and security or collateral.  This portfolio is now 6.2bn, (H1 2015: 4.9bn) with a further 440m in lifetime mortgages. 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 as the hunt for yield continues with lower for longer interest rates. 
diverse new business OPPORTUNITIES
The global demographic trend of ageing populations is here to stay. 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 providing those products and services. One such consequence is the demise of private sector defined benefit pensions globally and its associated need for a managed run-off. Another consequence is more individuals aiming for financial security in retirement and a need to accumulate wealth, and then access this wealth flexibly in retirement. Our new business themes of Global Pension Risk Transfer and Individual Retirement Choices are there to meet these two substantial and growing needs.
Global Pension Risk Transfer
We completed 686m of buy-ins and buy-outs in the first half of 2016, and a further 750m buy-in with the ICI Pension Fund on 5th July. The 686m included 250m in June alone and a $65m US bulk annuity deal in February. 
The UK private sector defined benefit market is estimated at 2 trillion and the UK market pipeline for pension risk transfer remains strong. We are currently quoting on over 13bn of buy-in and buy-out deals and over 16bn of longevity deals.Whilst lower real yields increase the average pension fund deficit, the post referendum outcome for pension funds has varied meaningfully depending on the amount of LDI hedging they have done, the extent to which equities have been switched to bonds, and the extent to which equities have been diversified globally with or without currency hedging. We estimate that at least 50% of the interest rate and inflation risk has been removed from the UK private sector defined benefit system.
Furthermore,pension funds are looking to de-risk in steps that can include tranches of pensioner buy-ins, top-slicing, medically underwritten bulk annuities or longevity insurance as a first step. Pension funds do not need to be fully funded or fully hedged to make progress. Legal & General is well placed for this incremental approach as a financially sound partner, committed to the pension risk transfer market. We are unique in being able to offer all possible pension risk transfer and DB pension de-risking steps. 
Our aim is to recreate this strategy in the US. The market pipeline of deals is substantial, we continue to quote diligently and build our experience in this market. Our reinsurance hub, L&G Re, A+-rated, in a Solvency II equivalent regime, and with registered reinsurer status in the Netherlands, allows us to participate as a reinsurer in European pension risk transfer market. We are quoting on several deals and are looking to build on last year's new business.
Individual Retirement Choices
We remain committed to the individual annuity market and wrote 158m in H1 2016, down 12% from the 180m written in H1 2015. In July, we agreed an arrangement with Aegon where Legal & General would be Aegon's preferred supplier of annuity business from October 2016. We expect this arrangement to increase Legal & General's individual annuity volumes by approximately 50%. 
Lifetime mortgage lending was 231m in H1 2016 (H1 2015: 37m). The lifetime mortgage market grew 24% in H1 2016 to over 900m and is on track to exceed 2bn for the first time in 2016. The number of people over 60 years old is expected to grow by 6.3 million in the next 20 years. This fact coupled with an estimated 1.4 trillion of housing equity currently owned by the over 65s in the UK, makes the long-term growth characteristics of this market strong.
In July 2016 we signed a 5 year agreement with Santander to offer Lifetime Mortgages to their customers. We anticipate that this will result in an additional 100m of lifetime mortgages per annum.
Industry consolidation 
The combination of Freedom & Choice in Pensions and the introduction of the EU's Solvency II regime has already led to consolidation among individual and bulk annuity providers. We participated in this consolidation in May with the acquisition of a 2.9bn back book of individual annuities from Aegon. In July we agreed a five year distribution agreement with Aegon to offer Legal & General annuities to Aegon customers from October 2016. The partnership is expected to generate around 200m of individual annuity sales in the first 12 months. We remain interested in further consolidation opportunities.
LEGAL & GENERAL investment management
FINANCIAL HIGHLIGHTS m
H1 2016
H12015
Management fee revenue
337
324
Transactional revenue
16
23
Total revenue
353
347
Total costs
(179)
(168)
Asset management operating profit
174
179
Workplace operating profit
(3)
(3)
Total operating profit
171
176
Net cash generation
134
138
Cost:income ratio1(%)
50
48
External net flows (bn)
9.6
13.8
Internal net flows (bn)
0.3
(1.0)
Total net flows (bn)
9.9
12.8
 Of which international (bn)
6.7
5.4
bn
H1 2016
H12015
Assets under management, including overlay assets2
841.5
714.6
Advisory assets
11.6
11.3
Total assets
853.1
725.9
Of which:
- International assets under management, including overlay assets2
151.9
115.8
- International advisory assets 
11.6
11.3
- Total international assets 
163.5
127.1
Assets under administration - Workplace Savings
17.3
13.1
1. Excluding Workplace Savings and recoverable market data costs which are treated as a cost of sale. 
2. Assets under management include overlay assets, which represent the notional value of derivative instruments on which LGIM earns fees. Fees are charged on notional values and as such are not subject to positive or negative market movements. 
resiliencE in challenging markets 
The business environment in the first half of 2016 has been challenging, given political and economic uncertainty and volatile market conditions. Against this backdrop, LGIM performed robustly in the first half of 2016, with operating profit down 3% to 171m (H1 2015: 176m). External net flows remained positive at 9.6bn (H1 2015: 13.8bn), contributing to 18% growth in AUM to 841.5bn (H1 2015: 714.6bn). Management fee revenues were up 4% to 337m, although transactional revenues were lower at 16m, driven by fewer property transactions.
LGIM continued its prudent investment across the business, with a focus on the areas that will provide growth and diversification in the future, resulting in a cost income ratio of 50%. The International business had strong net inflows of 6.7bn (H1 2015: 5.4bn), with positive flows in the US, Europe, the Gulf and Asia. The retail business performed strongly in a difficult market for investors, with external net inflows of 0.7bn (H1 2015: 0.3bn) and increased market share. In Workplace Savings, the operating loss was 3m (H1 2015: loss of 3m), as LGIM incurred acquisition costs to take on large pension schemes. 
breadth of investment management solutions 
Active
Asset movements 
Index
fixed
Solu- 
Real
Active 
Total 
Advisory
Total
bn
funds
income
tions
assets
equities 
AUM 
assets
assets
At 1 January 2016
274.3
106.8
338.2
18.3
8.5
746.1
10.5
756.6
External inflows 
17.6
3.5
6.6
0.8
-
28.5
28.5
External outflows 
(16.0)
(2.2)
(6.6)
(0.7)
(0.1)
(25.6)
(25.6)
Overlay / advisory net flows
-
-
6.7
-
-
6.7
(0.3)
6.4
External net flows
1.6
1.3
6.7
0.1
(0.1)
9.6
(0.3)
9.3
Internal net flows 
(0.4)
0.7
(0.1)
0.1
-
0.3
-
0.3
Total net flows 
1.2
2.0
6.6
0.2
(0.1)
9.9
(0.3)
9.6
Cash management movements
-
(0.6)
-
-
-
(0.6)
-
(0.6)
Market and other movements
24.9
17.6
44.3
(0.1)
(0.6)
86.1
1.4
87.5
At 30 June 2016
300.4
125.8
389.1
18.4
7.8
841.5
11.6
853.1
 
Total AUM increased 18% to 841.5bn (H1 2015: 714.6bn). Total external net inflows of 9.6bn (H1 2015: 13.8bn) were good in the context of political and economic uncertainty, and a difficult market. The strength of flows across our main product lines and channels reinforces the importance of diversifying our business, and illustrates the breadth of LGIM's investment capabilities. 
LGIM's liability-driven investment (LDI) and Multi-asset businesses have continued to grow over H1 2016. LGIM was the largest single beneficiary of a 25% increase in LDI mandates in 2015 and remains the UK market leader with a 44% share, according to the 2016 KPMG LDI survey. LGIM continues to gain market share in pooled LDI, which is the fastest-growing segment of the market. Solutions net inflows, including LDI and multi-asset products, were 6.7bn (H1 2015: 12.3bn). 
Index external net inflows of 1.6bn (H1 2015: 1.2bn outflow) were driven by the continued international diversification of this business, with net inflows of 5.7bn (H1 2015: 2.9bn) from the US, Europe, the Gulf and Asia. 
Net external inflows into Active Fixed Income of 1.3bn (H1 2015: 2.3bn) were driven primarily by institutional clients in all our main regions. 
The Retail business has performed strongly in an extremely difficult period with external net inflows of 0.7bn (H1 2015: 0.3bn), and it continues to gain market share. LGIM was second in net retail sales in Q2 2016, in what was a difficult quarter for the fund management industry (Pridham report). AUM increased to 21.4bn (H1 2015: 18.9bn). 
The Real Assets business has been impacted by the uncertainty caused by the referendum, leading to fewer transactions in the property market. LGIM has been able to keep its funds open during this period of significant volatility. External net inflows were 0.1bn (H1 2015: 0.4bn), with AUM of 18.4bn (H1 2015: 16.7bn).
OVER Two Million CUSTOMERs IN WORKPLACE PENSIONS 
LGIM has continued to build its defined contribution (DC) client base, winning schemes from across the market on both its investment only and workplace platforms. The total number of clients on its workplace platform now exceeds two million, in nearly 7,000 schemes. Net inflows were 0.8bn (H1 2015: 1.0bn) and total assets increased by 16% to 49.8bn (H1 2015: 42.8bn). LGIM has acquired a minority stake in Smart Pension, a fintech business, which will expand our presence in the SME market.
INTERNATIONAL expansion continues 
LGIM experienced strong net inflows of 6.7bn (H1 2015: 5.4bn) in its international businesses. Total International AUM was 151.9bn, a 31% increase on H1 2015: 115.8bn. Net inflows in the US business were 3.1bn (H1 2015: 4.8bn), with new defined benefit (DB) and DC mandates. The business continues to build its LDI and fixed-income capabilities, and growth in Index is accelerating. In the Gulf, inflows were 1.6bn (H1 2015: 0.9bn) as we deepened our existing client relationships. In Europe, net inflows were 1.5bn, driven by strong interest in our fixed income and multi-asset products. In Asia, LGIM strengthened its presence in the Japanese market, with inflows from our partnership with Meiji Yasuda and the signing of a second co-operation agreement with Nikko Asset Management. Asian net inflows for the period were 0.5bn (H1 2015: 0.1bn outflow). 
LEGAL & GENERAL CAPITAL
FINANCIAL HIGHLIGHTS m
H1 2016
H1 2015
Operational cash generation
113
92
Operating profit from:
UK Housing
39
15
Infrastructure
24
15
SME finance
5
2
Direct investment operating profit
68
32
Traded investment portfolio
59
79
Treasury assets
8
4
Total operating profit
135
115
Profit before tax
195
111
DIRECT INVESTMENT PORTFOLIO m
H1 2016
H1 2015
UK Housing
377
322
Infrastructure
506
379
SME Finance
181
77
1,064
778
TRADED PORTFOLIO1m
Equities
1,630
1,598
Fixed income
499
808
Multi-asset
472
221
Cash 
1,232
755
3,833
3,382
LGC investment portfolio
4,897
4,160
Treasury assets at holding company m
1,021
621
TOTAL
5,918
4,781
1. LGC traded portfolio includes holdings in consolidated funds, which include net non-financial receivables and payables of 15m (H1 2015: nil), which are reported separately in the Group's consolidated financial statements.
CORE UK TRENDS DRIVING DIRECT INVESTMENT STRATEGY
The direct investment portfolio delivered operating profit of 68m (H1 2015: 32m). 
Operating profit is calculated on an actual profit before tax basis or a smoothed IRR basis dependent on the category and stage of maturity of the investment. Direct investments from our operating business, such as CALA Homes, are recognised as our share of PBT, delivered 36m, representing 53% of direct investment operating profit (H1 2015: 10m, 31%).
The past six months has seen LGC continue to perform strongly, with considerable further investment in core sectors. Driven by long term social and economic trends, LGC invests in enterprises which contribute to UK growth with a focus on Housing, Infrastructure and SME finance. LGC targets attractive risk-adjusted returns for the Group whilst creating longer-term investment opportunities for other parts of Legal & General and institutional investors.
Housing operating profit increase to 39m in H1 2016 (H1 2015:15m)
CALA Homes delivered another year of strong performance, recording record revenues and profits. Private completions were up c.8% with private average selling price up c.6%. Strong levels of forward private reservations provide Cala with good visibility as the Group heads into the new financial year.
LGC launched a 600m build-to-rent JV with PGGM in early 2016 which now has three seed assets in Walthamstow, Bristol and Salford to build a total of 830 homes. Further sites are currently being targeted to support the growth of this platform. LGC continued to focus on realising the potential of its bank of strategic land, including a 250-acre site at Crowthorne with a GDV of approximately 450m where work has started to build c.1,000 new homes. LGC also launched its modular homes business which seeks to modernise home building, and opened a new facility outside Leeds. Fit-out of the factory continues and interest in the product is strong. 
Infrastructure, operating profit increase to 24m in H1 2016 (H1 2015: 15m)
Infrastructure includes urban regeneration and clean energy asset classes. During the period, plans were submitted to double the size of MediaCityUK (Salford) over the next decade, including up to ten new buildings with a GDV of more than 1bn. To date, the Lexicon (Bracknell) has signed several retail leases in a 200m scheme, bringing space let by floor area to 64% ahead of a 2017 opening. New tenancies have been completed at Thorpe Park (Leeds), including an agreement with Next during the period and further signings with M&S Simply Food and Arcadia post Brexit. In Cardiff, 97% of One Central Square has been let at the site adjacent to BBC Wales' new building which was acquired by LGR in 2015. Overall, property valuations held up in the period. 
LGC also agreed to partner with Newcastle City Council and University to develop the 350m Science Central 24-acre science and technology hub, and is set to create over 4,000 jobs, 500,000 sq ft of office space and 450 new homes. 
In clean energy, LGC's investment in NTR onshore wind fund reached final close in February at 246m, with new commitments made by the Ireland Strategic Investment Fund and Strathclyde Pension Fund. During the period, NTR managed the successful project financing of two of the Fund's wind farm projects, and acquired new sites to construct a further 27 MW capacity, bringing the total generating capacity for the fund to 82.5 MW. 
Going forward, LGC continues to seek partnerships with local developers and stakeholders across the UK's towns and cities, and maximise its partnership with the Regeneration Investment Organisation (RIO), whilst maintaining discipline over return on investment requirements.
SME Finance operating profit increase to 5m in H1 2016 (H1 2015: 2m)
Since the period ended, Pemberton has invested 78% of the committed capital from its inaugural European Mid-Market Debt Fund, a fund which is targeting 1-1.5bn and will hold the final close in the next three months. The business continues to perform strongly.
TRADED PORTFOLIO
LGC's traded investment portfolio delivered operating profit of 59m (H1 2015: 79m). Treasury assets contributed a further 8m (H1 2015: 4m) to operating profit.
Investment variance on the traded investment portfolio and treasury assets was 77m (H1 2015: (7)m), resulting in a combined profit before tax from traded assets of 144m (H1 2015: 76m).
The traded book holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash. Overall the book performed above assumed returns over the half year period, benefiting from further global yield compression in the fixed income book. The portfolio also benefited from a currency translation effect on foreign holdings from the devaluation of GBP following the market reaction to the outcome of the EU Referendum.
LGC holds cash for a variety of reasons including working capital, collateral to cover derivatives trades and cash awaiting longer term investment. In addition, Group Treasury holds cash and near cash investments to cover a range of uses including working capital, imminent known cash flows and collateral to cover derivatives.
INSURANCE
FINANCIAL HIGHLIGHTS m
H1 2016
H12015
Operational cash generation
159
161
New business surplus
7
-
Net cash generation
166
161
Experience variances, assumption changes, tax and non-cash movements
(28)
25
Operating profit
138
186
Profit before tax
46
138
UK Protection new business annual premiums
118
119
Retail Protection gross premiums
582
545
Group Protection gross premiums
233
229
General Insurance gross premiums
156
164
Total UK gross premiums
971
938
sustained net cash generation
Operational cash generation reduced by 2% to 159m (H1 2015: 161m). This included 48m (H1 2015: 18m) of dividends received from Legal & General Netherlands as we continue to optimise the efficiency of our balance sheet. This additional 30m is not expected to repeat in H2 2016. UK Protection operational cash generation was lower at 80m (H1 2015: 112m) following changes to the modelling for reinsurance contracts in 2015, to ensure sufficient prudence is being held in later years. 
New business surplus was 7m (H1 2015: nil) as we maintain a disciplined focus on cost management and benefitted from further scale efficiencies. 
continued growth in premium income
Retail Protection gross premium income increased 7% to 582m (H1 2015: 545m) with new business annual premium of 82m (H1 2015: 79m).We remain a leading provider of Retail Protection in the UK and benefit from a highly efficient automated underwriting model and broad distribution reach. Our direct distribution channel delivered Retail Protection new business APE of 16m, representing 14% growth on H1 2015 and now accounts for 20% of new business APE (H1 2015: 14m, 18% of new business APE). Group Protection gross premium was 233m (H1 2015: 229m) with new business of 36m (H1 2015: 40m).
General Insurance gross premiums reduced to 156m (H1 2014: 164m) as we maintained pricing discipline in a competitive market. Our direct business delivered GWP of 54m in H1 2016, representing 15% growth on H1 2015 and now accounts for 35% of gross premiums (H1 2015: 47m, 29% of gross premiums). 
Legal & General Mortgage Club facilitated 26bn of mortgages in H1 2016 (H1 2015: 20bn) 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 now involved in one in five of all UK mortgage transactions. Legal & General Surveying Services continues to deliver a strong performance, completing over 250k surveys (H1 2015: c.240k).
operating profit impacted by ADVERSE GROUP LIFE MORTALITY
Insurance operating profit fell by 48m to 138m (H1 2015: 186m) as a consequence of a 40m lower expected release from the UK Protection back book and adverse mortality experience of 18m (H1 2015: 5m positive), mainly arising in our Group Protection business. Our General Insurance operating profit was 31m (H1 2015: 38m), despite the impact of the flash floods in June, which cost c.5m and the introduction of the annual Flood Re levy of 9m, which added 6% to the H1 combined operating ratio. 
These impacts were partially offset by a 31m positive assumption change following a review of the prudence held for UK protection renewal expenses. H1 2015 operating profit also included 7m operating profit from Legal & General France, which was disposed of on 31st December 2015. 
Profit before tax impacted by interest rates
Insurance profit before tax reduced to 46m (H1 2015: 138m), as a result of negative investment variance of (92)m (H1 2015: (48)m) following a c.1% reduction in UK government bond yields, which impacted the discount rate used to calculate the reserves for our UK Protection liabilities.
savings
FINANCIAL HIGHLIGHTS m
H1 2016
H1 2015
Operational cash generation
51
67
New business strain
(3)
(5)
Net cash generation
48
62
Experience variances, assumption changes, tax and non-cash movements
1
(7)
Operating profit
49
55
Profit before tax
53
35
Operational cash generation reduced to 51m (H1 2015: 67m) as we continue to manage the reducing contribution from our declining mature savings business. Net cash generation was 14m lower at 48m (H1 2015: 62m), with new business strain of 3m (H1 2015: 5m) as we reduce the cost base associated with this business. 
Operating profit remains strong at 49m (H1 2015 : 55m). The introduction of robotics has increased automation and we continue to enhance our digital offering to provide more flexibility for our customers.
On the 15 January 2016 the Group announced the sale of Suffolk Life to Curtis Banks Group for 45m, which completed on 25th May 2016. In H1 2016 and 2015 Suffolk Life contributed nil to operational cash, net cash generation and operating profit.
Platform assets grow
Total
Platforms
Mature Retail Savings
Consol
Adj
Savings excluding Suffolk Life
Suffolk
Life
Assets under administration
bn 
bn 
bn 
bn
bn
At 1 January 2016
76.9
29.6
(6.8)
99.7
8.6
Gross inflows
2.2
0.5
(0.2)
2.5
0.5
Gross outflows
(2.9)
(1.8)
0.3
(4.4)
(0.3)
Net flows
(0.7)
(1.3)
0.1
(1.9)
0.2
Market and other movements 
1.3
1.1
-
2.4
-
Disposal of Suffolk Life
-
-
1.8
1.8
(8.8)
At 30 June 2016
77.5
29.4
(4.9)
102.0
-
Our Platforms business net flows of (0.7)bn (H1 2015: 1.1bn). Assets under administration (AUA) increased to 77.5bn (H1 2015: 74.6bn).
Whilst our platform pension AUA has grownin H1 2016, we have seen outflows increase mainly through partial encashment as customers withdraw money for income and other purposes. In Mature Savings, assets were 29.4bn (H1 2015: 34.8bn). Mature Savings net outflows have improved year on year due to improved retention of our books and in our With-Profits businessdue to the reducingmaturity profile of some products, particularly Endowments.
FREEDOM AND CHOICE 
Since the introduction of the Pensions Reform legislation we have seen an increase in the proportion of customers wishing to take their pension pots as cash withdrawals, with approximately 90%, or 27,000 customers, electing to take cash payments. Our average payment size is 11k. This compares to approximately 60% of customers taking cash before the reform legislation was announced.
LEGAL & GENERAL AMERICA
FINANCIAL HIGHLIGHTS $m
H1 2016
H12015
Operational cash generation
88
80
Operating profit
62
61
Gross premium income
601
588
New business sales (APE)
41
62
improved cash generation
Operational cash generation increased by 10% to $88m (H1 2015: $80m). This represents the dividends paid by Legal & General America (LGA) to the Group and reflects the focus of LGA to deliver operational cash generation.
Operating profit was $62m (H1 2015: $61m) in spite of the ongoing low interest rate environment reflecting continued growth in premium revenue. 
Gross premium revenue increased 2% to $601m (H1 2015: $588m) and continues to benefit from strong relationships with the brokerage general agents, (BGAs), who distribute term assurance in the US market. LGA is the 10th largest provider of term life assurance, by annual premium equivalent, in the US and remains the 3rd largest provider through the key distribution channel of BGAs. LGA now has 1.22m policies (H1 2015: 1.18m). 
new business focus on margin improvement
New business volumes were $41m (H1 2015: $62m). LGA continues to focus on increasing margins and sustaining strong cash generation to the Group. New business volumes for H2 2016 are expected to be broadly consistent with H2 2015 of $44m. 
Facilitating US Pension risk transfer (PRT) Business
LGA is important to the expansion of the Group in the US and will continue to provide the regulatory balance sheet, administrative services and payments to annuitants for LGR America and back office support for LGIM America. 
borrowings
Legal & General continues to have a strong liquidity position reflecting its requirements for working capital and derivative collateral. The Group's outstanding core borrowings total 3.1bn (FY 2015: 3.1bn). There is also a further 0.4bn (FY 2015: 0.5bn) of operational borrowings including 0.2bn (FY 2015: 0.6bn) of non-recourse borrowings. 
Group debt costs of 86m (H1 2015: 75m) reflect an average cost of debt of 5.4% per annum (H1 2015: 5.1% per annum) on average nominal value of debt balances of 3.2bn (H1 2015: 3.0bn).
taxation - effective tax rate of 19.2%
Equity holders' Effective Tax Rate (%)
H1 2016
H12015
Equity holders' total Effective Tax Rate
19.2
18.6
Annualised rate of UK corporation tax
20.00
20.25
In H1 2016, the Group's effective tax rate remained slightly below the UK corporation tax rate due to a number of differences between the measurement of accounting profit and taxable profits. 
Trading losses within Legal & General Pensions Limited, which previously benefitted both LGR and Insurance, were fully utilised in 2015. 
operational and net CASH GENERATION 
The table below is set out in the format of the operational cash generation guidance for 2016 given at the time of the 2015 results announcement. Net cash generation increased by 16%. This includes the full year ordinary dividend of $88m from LGA which was received in Q1 2016.
Updated
m
H12016
H1 2015
2016 FY guidance
LGR
205
171
Insurance excluding General Insurance
134
131
Savings
51
67
LGA
61
52
LGC
113
92
Sub-total (on which we provide guidance)
564
513
+ c.5%
LGIM
145
150
General Insurance
25
30
Operational cash generation from divisions
734
693
Group debt costs
(69)
(60)
Other costs
(10)
(9)
Total operational cash generation
655
624
New business surplus
72
5
Net cash generation
727
629
The revised operational cash generation guidance above, for FY 2016, reflects a higher proportion of cash and cash equivalents assets in the LGC portfolio than anticipated at the time of our FY 2015 results.
cash generation and earnings
The table below highlights the linkage between the operational and net cash generation of the business, and the profit of the Group.
 
Op
Strain
Net
Variances
Profit
Tax
Profit
Cash
Cash
and
after
before
m
Gen
Gen
other
tax
tax
LGR
205
79
284
50
334
72
406
LGIM
145
(11)
134
-
134
37
171
- LGIM (excluding Workplace)
136
-
136
-
136
38
174
- Workplace Savings
9
(11)
(2)
-
(2)
(1)
(3)
LGC
113
-
113
-
113
22
135
Insurance
159
7
166
(56)
110
28
138
Savings
51
(3)
48
(9)
39
10
49
LGA
61
-
61
(43)
18
25
43
Operating profit from divisions
734
72
806
(58)
748
194
942
Group debt and other costs
(79)
-
(79)
(17)
(96)
(24)
(120)
Adjusted operating profit
655
72
727
(75)
652
170
822
Kingswood closure costs
-
-
-
(36)
(36)
(9)
(45)
Operating profit
655
72
727
(111)
616
161
777
Investment and other variances
-
-
-
51
51
(2)
49
Total
655
72
727
(60)
667
159
826
Per share
10.95
12.21
11.21
Dividend per share
4.00
4.00
SOLVENCY II
As at 30 June 2016 the Group had an estimated Solvency II surplus of 5.3bn over its Solvency capital requirement, corresponding to a Solvency II coverage ratio of 158%. 
Capital (bn)1
H1 2016
FY 2015
Group capital resources
14.3
13.5
Group capital resources requirements
(9.0)
(8.0)
Surplus
5.3
5.5
SCR Coverage ratio (%)
158%
169%
1. Solvency II position on a proforma basis as at 30 June 2016 and before the accrual of the interim dividend.
Analysis of movement from 1 January to 30 June 2016 (bn)
Solvency II surplus
Solvency II surplus as at 1 January 2016 
5.5
Operating experience expected release
0.5
Operating experience new business 
-
Market movements
(0.6)
Other capital movements
0.5
Dividends declared in the period 
(0.6)
Solvency II surplus as at 30 June 2016
5.3
When stated on a shareholder basis, excluding the SCR attributable to our With-Profits fund of 651m from both the Group's eligible own funds and the SCR, the Group's coverage ratio increases to 163%. 
estimated solvency II new business contribution
Following our decision to discontinue European Embedded Value reporting, we committed to provide the market with a replacement measure of new business profitability under the new Solvency II regime.
The "Solvency II Value Metric" provides a measure of the value created in the business allowing for the run-off of Solvency II capital. The Value Metric essentially follows the principles of the EEV, but assumes profit emergence based on a Solvency II basis instead of the previous Solvency I Pillar 1 regime. Other methodologies are unchanged.
Management estimates of the value of new business and the margin as at H1 2016 are shown below: 
 
Contribution from
PVNBP
new business
Margin %
LGR1(m)
3,743
382
10.2
UK Insurance Total (m)
727
81
11.1
- Individual protection
565
69
12.2
- Workplace health and protection
162
12
7.4
LGA ($m)
435
54
12.4
 
1. UK annuity business.
Key assumptions in calculating the Solvency II new business contribution are shown below:
Risk margin
3.5%
Risk free rate
- UK
1.1%
- US
1.3%
Risk discount rate (net of tax)
- UK
4.6%
- US
4.8%
Long term rate of return on non-profit annuities in LGR
3.2%
All other assumptions and methodologies that would have a material impact on the margin for these contracts are unchanged from end 2015 other than the cost of currency hedging which has been updated to reflect current market conditions and hedging activity in light of Solvency II.
economic capital
Economic capital is the amount of capital that the Board believes the Group needs to hold, over and above its liabilities, in order to meet the Group's strategic objectives. Our Economic Capital model is not subject to review or approval by the Prudential Regulatory Authority (PRA).
As at 30 June 2016 Legal & General Group had an economic capital surplus of 8.1bn (FY 2015: 7.6bn), corresponding to an economic capital coverage ratio of 235% (FY 2015: 230%). 
Eligible own funds increased by 0.5bn to 14.0bn (FY 2015: 13.5bn). The economic capital requirementwas 5.9bn (FY 2015: 5.9bn).
Capital (bn)
H1 2016
2015
Eligible own funds
14.0
13.5
Economic capital requirement
(5.9)
(5.9)
Economic capital surplus
8.1
7.6
Coverage ratio (%)
235
230
Analysis of movement from 1 January to 30 June 2016 (bn)
Economic Capital surplus
Economic solvency position as at 1 January 2016 
7.6
Operating experience expected release
0.5
Operating experience new business 
0.2
Market movements
0.1
Other capital movements
0.3
Dividends declared in the period
(0.6)
Economic solvency position as at 30 June 2016
8.1
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 is exposed to a number of key risk categories.
RISKS AND UNCERTAINTIES
TREND, OUTLOOK AND MITIGATION
Reserves and our assessment of capital requirements may require revision as a result of changes in experience, regulation or legislation. 
The writing of long-term insurance business requires the setting of assumptions for long-term trends in factors such as mortality, lapse rates, valuation interest rates, expenses and credit defaults. Actual experience may result in the need to recalibrate these assumptions reducing profitability. Management estimates are also required in the derivation of Solvency II capital metrics. These include modelling simplifications to reflect that it is not possible to perfectly model the external environment, with adjustment necessitated where new data emerges. Forced changes in reserves can also arise from regulatory or legislative intervention in the way that products are priced, reducing profitability and future earnings.
We undertake significant analysis of the variables associated with writing long-term insurance business to ensure that a suitable premium is charged for the risks we take on, and that reserves continue to remain appropriate. Certain extreme events, however, could require us to adjust our reserves. For example in our annuities business, while recent trend data suggests the rate of longevity improvement may be slowing, we are inherently exposed to the risk that a dramatic advance in medical science beyond that anticipated leads to an unexpected change in life expectancy. This could require adjustment to reserves as improvements in mortality emerged. In our protection businesses, the emergence of new factors with potential to cause widespread mortality / morbidity or significant policy lapse rates may similarly require us to re-evaluate reserves. To mitigate these risks we remain focused on developing a comprehensive understanding of longevity science and continue to evolve and develop our underwriting capabilities for protection business. Our selective use of reinsurance also acts to reduce the impacts of these risk factors.
Investment market performance and conditions in the broader economy may adversely impact earnings, profitability or surplus capital. 
The performance and liquidity of investment markets, interest rate movements and inflation impact the value of investments we hold in shareholders' funds and those to meet the obligations from insurance business, with the movement in certain investments directly impacting profitability. Interest rate movements and inflation can also change the value of our obligations. We use a range of techniques to manage mismatches between assets and liabilities. However, loss can still arise from adverse markets. Interest rate expectations leading to falls in the risk free yield curve can also create a greater degree of inherent volatility to be managed in the Solvency II balance sheet, than the underlying economic position would dictate, potentially impacting capital requirements and surplus capital. In addition, significant falls in investment values can reduce fee income to our investment management business, while broader economic conditions can impact the purchase and the retention of retail financial services products, impacting profitability. 
During the first half of 2016, we have seen volatility in financial markets as they have responded to uncertainties in the global economy and more recently to the outcome of the UK referendum on membership of the EU. For Legal & General the vote to leave has little direct impact on trading, as our customer base is located very largely in the UK, the US and Asia. It is, however, probable that a potentially lengthy period of negotiation and an uncertain outcome will create on-going uncertainty for financial markets and the broader UK economy in which we operate; with potential for asset price shifts should markets reappraise their value in the light of uncertainties. Whilst the monetary policies of leading economies now look set to remain loose, with a further sustained period of low interest rates, potential exists for renewed financial stress in Europe driven by political uncertainty and residual weaknesses in the Euro currency banking systems. Broader geo-political events also have potential to cause shocks to financial markets, with on-going illiquidity in bond markets having potential to exaggerate the impacts of any significant market corrections. Overall, we seek as part of our business planning activity to model a broad range of economic and financial market scenarios so as to ensure our strategies remain resilient; however, it is not possible to completely remove risk from external market and economic factors.
In dealing with issuers of debt and other types of counterparty the group is exposed to the risk of financial loss. 
A systemic default event within the corporate sector, or a major sovereign debt event, could result in dislocation of bond markets, significantly widening credit spreads with consequential impacts on the value of our bond portfolios, and may result in default of even strongly rated issuers of debt, exposing us to financial loss. We are also exposed to banking, money market and reinsurance counterparties, and settlement, custody and other bespoke business services, a failure of which could expose us to both financial loss and operational disruption of our business processes. Under Solvency II, a widespread widening of credit spreads and downgrades can also result in a reduction in our Solvency II balance sheet surplus, despite already setting aside significant capital for credit risk. 
Any deterioration in economic conditions inherently increases default risks, which in turn may impact our Solvency II balance sheet surplus. Current risk factors include the changing global economic outlook with uncertainties following the UK referendum on EU membership potentially exacerbating down side risks, a renewed banking crisis within the Euro zone area and default on debt linked to commodity markets. We continue to actively manage our exposure to default risks within our bond portfolios, setting selection criteria and exposure limits, and using the capabilities of LGIM's global credit team to ensure the risks are effectively controlled, and if appropriate traded out to improve credit quality. We also seek to closely manage risks to our Solvency II balance sheet through monitoring factors that could give rise to a heightened level of default risk. We continue to diversify the asset classes backing our annuities business, investing in real assets and property lending investments, continuing to be highly selective in the counterparties with which we will deal. However, we can never completely eliminate default risks or their impacts to our Solvency II balance sheet, although we seek to hold a strong balance sheet that we believe to be prudent for a range of adverse scenarios. 
Changes in regulation or legislation may have a detrimental effect on our strategy. 
Legislation and government fiscal policy influence our product design, the period of retention of products and our required reserves for future liabilities. Regulation defines the overall framework for the design, marketing, taxation and distribution of our products; and the prudential capital that we hold. Significant changes in legislation or regulation may increase our cost base, reduce our future revenues and impact profitability or require us to hold more capital. The prominence of the risk increases where change is implemented without prior engagement with the sector. The nature of long-term business can also result in some changes in regulation, and the re-interpretation of regulation over time, having a retrospective effect on our in-force books of business, impacting the future cash generation.
There remains a significant regulatory change agenda, both from the EU and from within the UK. Current changes in EU driven regulation include UCITS V, MIFID II and PRIIPS. While over the longer term, "Brexit" will potentially lead to a re-writing of some elements of the financial services legislation applicable to UK businesses, until the UK formally exits the EU and the UK Government legislates otherwise, EU derived legislation will remain in force. In negotiating an exit from the EU, there is also the risk that proposals have unintended consequences for the operation of the UK financial services sector. With regard to existing UK regulation, alongside the PRA ensuring the effective operation of Solvency II and an on-going requirement upon Legal & General to ensure compliance with the new regulatory framework, the FCA continues to focus on its approach to consumer regulation, and there remain challenges in ensuring that regulatory interpretation of rules is proportionate and cost effective and align with businesses that are becoming increasingly digital. The FCA programme of thematic reviews of industry practices may also lead to additional business remediation costs, and we cannot completely eliminate the risk that historic accepted practices may be reappraised by regulators, resulting in sanction against the Group. We remain vigilant to the impacts of future legislative and regulatory change, internally preparing our businesses for known factors, and externally seeking to engage with government and regulatory bodies in the UK and Europe so as to develop outcomes that meet the needs of all stakeholders.
New entrants may disrupt the landscape of the markets in which we operate. 
As has been seen in other business sectors, it is possible that alternative digitally enabled providers of financial service products emerge with lower cost business models or innovative service propositions and capital structures disrupting the current competitive landscape.
We are executing a digital strategy, using platforms that allow for growth and high scale. We continue to enhance our online capabilities for auto-enrolment, investment platforms and individual retirement products ensuring focus on customer engagement and the digital experience. We recognise there is potential for entry into our markets by scale overseas competitors who may have lower return on capital requirements and be unconstrained by Solvency II. 
A material failure in our business processes may result in unanticipated financial loss or reputation damage. We have constructed our framework of internal controls to minimise the risk of unanticipated financial loss or damage to our reputation. However, no system of internal control can completely eliminate the risk of error, financial loss, fraudulent actions or reputational damage.
Our plans for growth together with the regulatory change agenda inherently increase the profile of operational risks across our businesses. We continue to invest in our system capabilities and business processes to ensure that we meet the expectations of our customers; comply with regulatory, legal and financial reporting requirements; and mitigate the risks of loss or reputational damage from operational risk events. We recognise however, that residual risk will always remain and have designed our risk governance framework to ensure that when adverse events occur we can deploy appropriate responses. 
The financial services sector is increasingly becoming a target of 'cyber crime'. 
As we and our business partners increasingly digitalise our businesses, we are inherently exposed to the risk that third parties may seek to disrupt our online business operations, steal customer data or perpetrate acts of fraud using digital media. A significant cyber event could result in reputational damage and financial loss.
The financial services sector remains a target for those who seek to exploit perceived vulnerabilities in IT systems. Potential threats continue to evolve but include denial of service attacks, network intrusions to steal data for the furtherance of financial crime, and the electronic diversion of funds. We are focused on maintaining a robust and secure IT environment. Working with our business partners, we seek to ensure the security of our systems with proactive responses to emerging threats. However, the evolving nature of cyber threats means that residual risks will always remain. 
ENQUIRIES
Investors:
Laura Doyle Head of Investor Relations  020 3124 2088
Sujee Rajah  Investor Relations Manager  020 3124 2047
Media:
Richard King Head of Group Corporate Communications020 3122 095
Doug Campbell Tulchan Communications020 7353 4200
Notes
A copy of this announcement can be found in "Results", under the "Financial information" section of our shareholder website at http://www.legalandgeneralgroup.com/investors/results.cfm.
A presentation to analysts and fund managers will take place at 10.00am UK time today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of the presentation which can be accessed at http://www.legalandgeneralgroup.com/investors/results2016.htmlA replay will be available on this website later today. 
There will be a live, listen only, teleconference link to the presentation. Details below:
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2016 Financial Calendar
Date
Ex-dividend date
18th August 2016
Record date
19th August 2016
Payment date of 2016 interim dividend
22nd September 2016 
DEFINITIONS
Definitions are included in the Glossary.
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 acquisition 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, including the additional market uncertainty caused by the UK decision to exit the EU, are detailedabove. In addition, the financial statements include, amongst other things, notes on the Group's objectives, polices 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.
In the period leading up the EU referendum and the days subsequent there has been significant market uncertainty and volatility. The Group manages and monitors its capital with various stresses built in 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 2015, with the exception of John Stewart who retired as non-executive director and chair on 1 June 2016 and Olaf Swantee who retired as non-executive director on 26 May 2016.Lesley Knox joined the Board as non-executive director on 1 June 2016 and Philip Broadley joined the Board as non-executive director on 8 July 2016. A list of current directors is maintained on the Legal & General Group Plc website: legalandgeneralgroup.com.
By order of the Board
Nigel Wilson Mark Gregory
Group Chief ExecutiveGroup Chief Financial Officer
8 August 2016   8 August 2016



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