REG - Legal & General Grp - L&G Half Year Results 2023 Part 1
15/08/2023 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230815:nRSO2890Ja&default-theme=true
RNS Number : 2890J Legal & General Group Plc 15 August 2023
H1 2023 Results: £0.95bn of operating profit and capital generation, stock of deferred profits up to £13.8bn, DPS up 5% to 5.71p and SII ratio of 230%
Resilient financial performance(1)
· Operating profit of £941m (H1 2022: £958m)
· Solvency II coverage ratio(2) of 230%, with surplus of £9.2bn (H1
2022: 212%)
· Solvency II operational surplus generation of £947m (H1 2022:
£946m)
· Profit after tax(3) of £316m (H1 2022: £575m)
· Interim dividend of 5.71p, up 5% (H1 2022: 5.44p)
£947m capital generation with significant dividend headroom(4)
· We are on track to achieve our five-year (2020-2024) ambitions. To
date:
‒ Capital generation of £5.9bn (£8.0-9.0bn by 2024)
‒ Dividends of £3.6bn (£5.6-5.9bn by 2024)
‒ Net surplus generation over dividends of £0.6bn(5)
· The Board's intention is to continue to grow the dividend at 5% per
annum to FY24(6)
Stock of deferred profits up to £13.8bn as new business outpaces backbook
release(7)
· New business deferred profits of £0.6bn
‒ LGRI premiums of £5.0bn (H1 2022: £4.4bn) generating deferred profit
of £0.4bn(8)
‒ In H2, LGRI has already written a further £1.8bn UK and $1.0bn US PRT
"We remain on track to achieve our five-year ambitions and deliver attractive
returns for our shareholders. In H1, we delivered £0.95bn of both IFRS
operating profit and capital generation, together with a Solvency II ratio of
230% and a surplus of £9.2bn. The dividend is up by 5%. LGRI and LGC
performed strongly, LGIM results stabilised, and Retail's performance - while
impacted by competition in some areas - was bolstered by growing annuity sales
and progress in US protection. We wrote £4.9bn of UK PRT, deploying just
£106m of capital, underlining the benefits of our synergistic business model.
I'd like to thank my colleagues for their contribution and ongoing commitment
to inclusive capitalism, serving our shareholders, customers and wider
society."
Sir Nigel Wilson, Group Chief Executive
Financial summary
£m H1 2023 H1 2022 Growth %
Analysis of operating profit
Legal & General Retirement Institutional (LGRI) 471 395 19
Retail 230 295 (22)
Legal & General Capital (LGC) 296 263 13
Legal & General Investment Management (LGIM) 142 200 (29)
Operating profit from divisions 1,139 1,153 (1)
Group debt costs (106) (108) 2
Group investment projects and expenses (92) (87) (6)
Operating profit(1) 941 958 (2)
Investment and other variances (incl. minority interests) (617) (261) n/a
Profit before tax attributable to equity holders(2) 324 697 (53)
Profit after tax attributable to equity holders 316 575 (45)
Earnings per share (p) 5.16 9.52 (46)
CSM(3) 12,352 11,546 7
CSM (net of tax) + Book Value 14,490 14,426 -
CSM + Book value per share (p) 241 240 -
Solvency II
Operational surplus generation 947 946 -
New business strain(4) (195) (121)
Net surplus generation 752 825
Solvency II Own Funds 16,197 17,374
Solvency Capital Requirement (7,036) (8,193)
Solvency II Surplus 9,161 9,181
Coverage ratio (%) 230 212 18
Interim dividend per share (p) 5.71 5.44 5
1. Operating profit is an Alternative Performance Measure and represents
Adjusted operating profit as defined on page 102.
2. Profit before tax attributable to equity holders is an Alternative
Performance Measure and represents Adjusted profit before tax attributable to
equity holders as defined on page 103.
3. CSM (gross of tax, net of reinsurance) includes the new business CSM
uplift associated with the L&G pension schemes' partial buy-in transaction
in H1. In H2 we expect to move to a full buy-out of the pension schemes.
4. This does not reflect the anticipated reduction in the Risk Margin (part
of planned reforms to the Solvency regime) which is estimated to reduce H1 New
business strain by £55-60m.
H1 2023 Financial performance
Income statement
Year to date operating performance is resilient with H1 2023 operating profit
from divisions of £1,139m (H1 2022: £1,153m). All four of our divisions
remain well-positioned to continue to execute on compelling structural market
opportunities to deliver further profitable growth over the medium and
long-term.
LGRI operating profit increased by 19% to £471m (H1 2022: £395m) underpinned
by the growing scale of backbook earnings and the consistent investment
performance of our annuity portfolio. LGRI executed higher new business
volumes to address growing demand while maintaining pricing discipline,
writing £4,992m of global PRT (H1 2022: £4,449m) at a Solvency II new
business margin (8.0%) 9 (#_edn1) in line with our long-term average. H2
has started well, with £1.8bn of UK PRT and $1.0bn of US PRT completed to
date.
Retail delivered operating profit of £230m (H1 2022: £295m). Whilst
insurance operating profit is up 4% (H1 2023: £243m, H1 2022: £234m), driven
by resilient ongoing profit releases in the UK and US, total operating profit
is down given the lower contribution from Fintech, as valuation uplifts from
H1 2022 did not repeat. The Retail Retirement business again delivered good
new business volumes, and we continue to focus on disciplined pricing to
ensure attractive shareholder returns.
LGC operating profit increased by 13% to £296m (H1 2022: £263m) driven by
our alternative asset portfolio, where operating profit increased to £230m
(H1 2022: £202m). Our Alternative Finance business, led by Pemberton,
continues to perform strongly, and in our Specialist Commercial Real Estate
portfolio, our targeted investments in infrastructure and science &
technology-focussed assets proved more resilient than the general commercial
property market. Our diversified, multi-tenure housing portfolio also remained
resilient with Cala, our largest housing business, continuing to perform well
in the face of a challenging market.
LGIM delivered operating profit of £142m (H1 2022: £200m) primarily
reflecting the impact of rising interest rates on assets under management,
which decreased by £132bn to £1,158bn (H1 2022: £1,290bn). Despite
significant inflationary impacts, we have taken action to keep absolute costs
flat on an FX-adjusted basis.
Profit before tax attributable to equity holders 10 (#_edn2) was £324m (H1
2022: £697m), reflecting investment variance of £(617)m (H1 2022:
£(261)m). H1 2023 investment variance was driven by the unrealised mark to
market impact of higher rates on our portfolio, the cost relating to our
announced Modular Homes closure and the write-down of our investment in Onto.
Balance sheet and asset portfolio
Group's Solvency II operational surplus generation (OSG) was level at £947m
(H1 2022: £946m) despite rising interest rates which reduced SCR releases.
Net surplus generation (NSG) was £752m (H1 2022: £825m). We operate a
capital light PRT business: in H1 2023, PRT capital strain was just over 2%.
New business strain does not include risk margin reforms, which have an
estimated H1 benefit of £55-60m for PRT and Individual annuities combined.
We have scope to write up to £11bn of UK PRT volumes and for the UK annuity
portfolio to be self-sustaining again in 2023, as it has been for the last
three years.
The Group reported a Solvency II coverage ratio 11 (#_edn3) of 230% at H1
2023 (FY 2022: 236%, H1 2022: 212%), slightly ahead of our recent
disclosure 12 (#_edn4) (c225%) which reflected some degree of prudence as we
continue to optimise our asset liability management.
Our IFRS return on equity of 13.0% (H1 2022: 22.8%) reflects the unrealised
mark to market impact of investment and other variances on the total
result. 13 (#_edn5) Looking at the result before investment variance,
return on equity would be 37.1% (H1 2022: 31.4%). We expect investment
variance to average to zero over the longer term. 14 (#_edn6)
Our stock of deferred profit increased 3% to £13.8bn (H1 2022: £13.4bn),
with CSM up 7% to £12.4bn, reflecting contributions from our growing annuity
businesses and routine longevity updates in H2 2022, partially offset by the
Risk Adjustment (£1.5bn) reducing from H1 2022 (£1.9bn) as a result of
rising interest rates. 15 (#_edn7)
Our diversified, actively managed annuity portfolio has continued to perform
resiliently. In H1 2023 our annuity portfolio experienced no downgrades to
sub-investment grade and more upgrades than downgrades. There were no material
property or credit write downs. The annuity portfolio's direct investments
have received 100% of scheduled cash-flows year to date, reflecting the high
quality of our counterparty exposure.
Group Strategy
Legal & General has established expertise in asset origination (LGC) and
asset management (LGIM), and in the provision of retirement and protection
solutions to corporates and individuals (LGRI and Retail). We operate at
scale and are strongly positioned to capitalise on significant growth
opportunities across our chosen markets through our four divisions:
Division Provision Description
LGRI Retirement Solutions A leading international manager of institutional Pension Risk Transfer (PRT)
business
Retail Retirement & Protection Solutions A leading provider of UK retail retirement and protection solutions and US
term life insurance 16 (#_edn8)
LGC Asset Origination An alternative asset origination platform generating attractive shareholder
returns
LGIM Asset Management A global £1.2tn asset manager with deep pensions expertise
A powerful business model
We have a unique and highly synergistic business model, which continues to
drive a strong return on equity. Legal & General provides powerful asset
origination and management capabilities directly to clients. These
capabilities also underpin our leading retirement and protection solutions:
· LGRI is a market leader in UK PRT and a top ten player in the US PRT
market, with annuity assets of £55.5bn. 17 (#_edn9) It provides long-term
captive AUM to LGIM, and the annuity portfolio is continually enhanced through
the supply of alternative assets originated by LGC.
· Retail is a leading provider of UK retail retirement and protection
solutions, and US term life insurance. The UK retail retirement product
offerings include workplace savings, annuities, income drawdown and lifetime
mortgages (LTM). Workplace savings benefits from LGIM's existing DC
relationships and distribution team to win new schemes and the retail annuity
business provides captive AUM to LGIM Retail is also an internal centre of
excellence in technology, and manages a portfolio of complementary Fintech
investments.
· LGC invests across four main asset classes (Specialist Commercial
Real Estate, Clean Energy, Housing and Alternative Finance) to generate
attractive risk-adjusted shareholder returns and to create alternative assets
to (i) back our annuity portfolios in LGRI and Retail and (ii) meet the
growing third-party demand for alternative assets. LGC is increasingly
attracting third-party capital either directly through existing investments,
or through collaboration with LGIM.
· LGIM is a leading global asset manager, ranking 11(th) in the
world 18 (#_edn10) with £1.2tn of AUM of which £457bn, or 39%, are
international assets 19 (#_edn11) . LGIM is a leading provider of UK and US
Defined Benefit (DB) de-risking solutions. It is uniquely positioned to
support DB clients across the full range of pension 'Endgame' destinations,
including PRT with LGRI. 81% of LGRI's PRT transactions over the past three
years were from existing LGIM clients. 20 (#_edn12) LGIM is also the
market leader in UK Defined Contribution (DC) pension scheme clients with DC
AUM of £146bn - a market with significant growth potential, with total UK DC
assets expected to surpass £1.2tn by 2031. 21 (#_edn13)
The synergies within and across our businesses drive profits and fuel future
growth.
The integrated nature of our business model means we have relationships with
clients and customers that can and do last for decades. A corporate client
in LGIM has historically become a PRT client after 14 years, however this is
now expected to accelerate due to improved funding levels. We are working
with LGIM clients to reconfigure their portfolios to lock in any funding gains
that have been made, by better matching to a typical insurance pricing
portfolio and to position the assets to be more easily transferred as part of
a buy-in or buyout transaction. Once moved to PRT, LGRI will then typically
have a relationship with that client for another 30 to 40 years. Similarly,
Retail Retirement and LGIM may have a 30-40 year relationship with a customer
during the DC accumulation phase, and then extend that relationship for
another 15-30 years during the decumulation phase across a suite of
decumulation products including individual annuities, lifetime mortgages and
drawdowns.
The Group continues to build out, in a measured fashion, its international
franchise. We have made excellent progress in the US over the last decade
and will continue to grow all four divisions in that market. LGIM continues to
make good progress against its international expansion plans in the US, Europe
and Asia. Kerrigan Procter continues to coordinate the Group's expansion
plans in Asia building on the $167bn of regional assets already under
management (FY 2022: $150bn).
A long-term commitment to Sustainability and Inclusive Capitalism
Our purpose is to improve the lives of our customers, create value for our
shareholders and to build a better society for our customers, our
shareholders, and our communities. This inspires us to invest our assets in an
economically, environmentally and socially useful way to benefit society for
the long-term - what we call Inclusive Capitalism. We believe investing in
fundamental pillars of society will enable strong shareholder returns and
improve the lives of our customers.
Our philosophy underpins our approach to sustainability. 22 (#_edn14) We
think about sustainability in terms of:
1. How we invest proprietary assets. 23 (#_edn15) Our ambition is
to reduce our group investment portfolio economic carbon intensity by half by
2030 and to net zero carbon by 2050. In 2022, our group investment portfolio
economic carbon intensity fell by 5% versus 2021, through a combination of
market movements, partially offset by a muted emissions increase as business
activity increased. While the reduction of 23% from 2019 is ahead of our
2022 target, we may still see further volatility from future global events -
as experienced through the pandemic and the ongoing conflict in Ukraine - and
therefore remain focused on delivery of our mid-to-long-term decarbonisation
targets. We continue to make environmentally and socially useful
investments. As at H1 2023, we have invested £1.4bn in clean energy and
£8.7bn in social infrastructure. For more information, please see our
latest Climate Report, compliant with recommendations by the Task Force on
Climate-related Financial Disclosures (TCFD), and our latest Social Impact
Report, which describes our activity in investing for positive social,
economic and health outcomes. 24 (#_edn16)
2. How we influence as one of the world's largest asset managers with
£1.2 trillion AUM. We have £331.6bn AUM in ESG strategies, and in H1 2023,
our investment stewardship team engaged with around 630 companies, holding
them to account on the issues that matter most to our clients. 25 (#_edn17)
(, 26 (#_edn18) ) In June 2023, we reported on the latest cycle of our
Climate Impact Pledge engagement programme, which we have expanded to include
a quantitative assessment of over 5,000 companies across 20 climate-critical
sectors, alongside in-depth engagement with around 100 'dial mover' companies.
LGIM is proud to have received a 5 star ranking from the UN Principles for
Responsible Investment (UN PRI) for investment stewardship and policy, and to
have scored over 75% in each section of the latest UN PRI report. 27
(#_edn19) In addition to being among the highest rated managers for
engagement by FinanceMap, LGIM has also been highlighted by MajorityAction for
its approach to holding companies to account on climate change.
3. How our businesses operate. We are committed to supporting our
customers, employees, suppliers, shareholders and society at large. In the
current economic environment, we recognise that support is more critical now
than ever. For information on how we are supporting our stakeholders, please
see our Social Impact report.(14) We have committed to reducing the carbon
emission intensity of our operating businesses. Our ambition is to operate
our offices and business travel with net zero emissions from 2030, and for all
our new homes to be net zero operational carbon from 2030. ESG criteria are
included in executives' objectives and remuneration schemes.
CEO succession plans
In June, we were pleased to announce António Simões as the Group's next
Chief Executive Officer, subject to regulatory approval.
António will join from Banco Santander where he has been Regional Head of
Europe since September 2020. In this role, he leads Santander's businesses in
the UK, Spain, Portugal and Poland, working across retail and commercial
banking, corporate and investment banking, wealth management and insurance.
Prior to joining Santander, António spent 13 years at HSBC, including as CEO
of UK and Europe, and latterly CEO of Global Private Banking, based in London
and Hong Kong. He is a former McKinsey & Company partner.
António's appointment follows a rigorous, global, selection process managed
by Sir John Kingman, Group Chair. He will succeed Sir Nigel Wilson as Group
CEO. Sir Nigel has been Group CEO of Legal & General since 2012, and in
January announced his intention to retire from executive life.
Since Sir Nigel joined Legal & General, the Group has delivered a
consistently strong financial performance with a total shareholder return of
over 600% driven by significant growth in dividends, earnings per share and
ROE. During his time as Chief Executive, Sir Nigel has executed numerous
strategic initiatives to grow and re-focus the business, consistently
exceeding financial and operational targets while also ensuring Legal &
General has delivered Inclusive Capitalism with positive outcomes for
shareholders, customers and the broader economy.
António will take up his new post formally on 1 January 2024. Sir Nigel will
remain as Chief Executive in the meantime, continuing to focus on delivering
the strategy of the Group. Sir Nigel will work closely with António to ensure
a comprehensive handover and a smooth transition. António will join the Board
of Legal & General Group plc on appointment, at which point Sir Nigel will
step down from the Board.
Outlook
Confident in achieving our ambitions; well-positioned to deliver long-term
profitable growth
Our strategy has delivered strong compounding returns for our shareholders
over time. It has demonstrated resilience and positions us well to navigate -
and even benefit from - the prevailing market environment. We are confident
we can continue to deliver profitable growth as we execute on our strategy.
We set out five-year ambitions at our Capital Markets event in November
2020. Cumulatively, over the period 2020-2024, our financial ambitions 28
(#_edn20) are for:
· Capital generation (of £8.0bn - £9.0bn) significantly to exceed
dividends (of £5.6bn - £5.9bn) 29 (#_edn21)
· Earnings per share to grow faster than dividends, with the dividend
growing at 5% per annum to FY 2024 30 (#_edn22)
· Net capital surplus generation (i.e., including new business strain)
to exceed dividends
We made further progress against these ambitions in H1 2023 and remain
confident in achieving them. In H1 2023, we achieved £947m in capital
generation (H1 2022: £946m), and from the start of the ambition period to H1
2023, we have now achieved £5.9bn of cumulative capital generation while
declaring dividends of £3.6bn.
We remain highly confident in our strategy and in our ability to deliver
resilient, organic growth, supported by our strong competitive positioning in
attractive and growing markets. Our confidence in our dividend paying
capacity is underpinned by the Group's strong earnings and strong balance
sheet, which has Solvency II surplus regulatory capital of £9.2bn over a
capital requirement of £7.0bn.
Business segment outlook
Legal & General Institutional Retirement (LGRI)
LGRI participates actively in the global pension risk transfer (PRT) market,
focusing on corporate defined benefit (DB) pension plans in the UK, the US,
Canada, Ireland and the Netherlands, which together have more than £6
trillion of pension liabilities. ( )
We write direct business in both the UK and US and are top-tier providers in
both markets. We are supported by LGIM's long-standing client relationships,
investment sourcing and asset management capabilities as well as LGC's asset
origination capabilities and Retail's lifetime mortgage origination.
The UK is our primary market and is the most mature PRT market globally with
£1.4 trillion of UK DB pension liabilities, of which an estimated c15% has
been transferred to insurance companies to date. 31 (#_edn23) The
addressable market therefore remains significant and demand for PRT is growing
as rising interest rates and widening credit spreads reduce pension deficits
and allow more funds to consider de-risking options.
Our stated ambition is to write circa £8-10bn of UK PRT per annum and we are
confident of achieving this. We have demonstrated that this level of new
business is self-sustaining, i.e. the growing amount of capital generated by
our in-force UK annuity book more than offsets both the capital investment
required to fund new business and the portfolio's contribution to our
progressive Group dividend.
The UK annuity portfolio achieved self-sustainability in 2020, 2021 and
2022. Over the period from the beginning of 2020 to H1 2023, Group net
surplus generation has exceeded dividends by a total of £0.6bn. For 2023 as a
whole, we currently have capacity to write up to £11bn of UK PRT and still
achieve self-sustainability for the UK annuity portfolio.
The US represents another significant market opportunity, with $3.2 trillion
of DB liabilities, of which an estimated c11% have transacted to date. 32
(#_edn24) Since our market entry in 2015, our US business has completed 96
transactions and written $8.6bn of business.
Canada is a market that has potential and where we have seen a growing
acceleration of pension schemes looking to de-risk. The market is estimated
to have CAD $1.8tn of DB liabilities with only c10% of $0.5 trillion private
sector DB liabilities having transacted to date. 33 (#_edn25) Since our
market entry in 2019, we have written CAD $1.2bn of liabilities through our
reinsurance entity, L&G Re.
In the Netherlands, pension reform legislation could result in significant PRT
business coming to market over the next 3-4 years. With pension liabilities
of over €1 trillion 34 (#_edn26) , we continue to actively monitor this
market and have announced plans to enter into a long-term strategic
relationship with Lifetri in order to participate, should attractive
opportunities arise.
Our ambition is to write at least $10bn of international PRT over the five
years from 2020-2024. We have written $5.7bn of International PRT from 2020
through H1 2023, and we have written $1.0bn so far in H2. There remains
significant opportunity in these markets and we are well-positioned to
continue to execute where the margins justify.
Legal & General Retail Division (Retail)
Across all our Retail businesses, we continue to focus on our customers, with
a particular focus on the technology that supports providing a more efficient
and more personalised service.
Insurance
We leverage our technological innovation, operational strength and scale
efficiencies to offer market leading product offerings.
Our data and tech-led strategy makes our products more accessible to customers
and supports further product and pricing enhancements. Our retail protection
business is supported by our strong distribution relationships, investment in
our systems and platforms, and product enhancements.
We expect the retail protection market to continue to be impacted by a softer
housing market and by affordability considerations for consumers. Our
medium-term ambition remains unchanged. We continue to target mid-single
digit growth in revenues across our UK protection businesses to 2025.
In the US, we anticipate our ongoing technology investments and new
partnerships will position us for premium growth. We are already the largest
provider of term life assurance in the independent channel 35 (#_edn27) and
number three in overall US market share1, and our digital first approach is
aiming to achieve, on average, double digit growth in new business sales to
2025.
Retirement
Workplace savings is a core part of the Group's proposition. The business is
a growth area for the Group, and we expect the market to continue to expand,
driven by ageing demographics and welfare reforms. Our core focus is on
better assisting our 5.0 million Workplace members to plan for their
retirement whilst they are saving with us, as well as when they come to
retirement.
There are currently c£600bn in UK Defined Contribution (DC) accumulation
assets (of which LGIM manage £146bn including those administrated by
Workplace Savings), and this is expected to more than double over the next ten
years. 36 (#_edn28) As a market leading provider in Workplace Savings, we
are well placed to benefit from this expected increase in DC pension assets,
and to grow administration revenues for the Retail division and fund
management revenues for LGIM.
The 'at retirement' market is growing with the amount of DC assets at
retirement now reaching c£45.6bn per year. The individual annuity market is
continuing to perform well as interest rate rises make the cost of an annuity
more attractive. Retail Retirement has a strong market share in individual
annuities - 15.4% over Q1 2023 37 (#_edn29) and an external market share of
20.4%(27) .
The UK lifetime mortgage (LTM) market continues to represent a sizeable
long-term opportunity, with UK housing equity in over 55s at £4.4
trillion. 38 (#_edn30) Higher interest rates have reduced the
attractiveness of LTM's compared to last year, and we continue to remain
disciplined on pricing to deliver assets that add value to our portfolio.
Fintech
We've been making strategic investments in adjacent market Fintechs for many
years. Despite headwinds from current economic conditions, the majority of
our investment portfolio remains resilient, and we expect attractive new
opportunities to invest to arise. We are targeting double digit growth to
2025 for our Fintech businesses.
Legal & General Capital (LGC)
LGC, the Group's alternative asset origination platform, will continue to
deploy shareholder capital in a range of underserved areas of the real economy
which are backed by long-term structural trends. LGC has three fundamental
objectives: 1) profit and value generation within LGC for shareholders; 2)
asset creation to back LGRI and Retail annuity liabilities and to meet demand
from like-minded investors; and 3) a focus on high-return sustainability and
impact-focused investments, securing long lasting value for shareholders,
customers and society.
As previously communicated, our ambition is to build LGC's diversified
alternative AUM to c£5bn by 2025 (H1 2023: £4.2bn), with a blended portfolio
return target of 10-12%. In combination with the contribution from the
Traded Portfolio, LGC's ambition is to deliver operating profit of £600-700m
in 2025. Additionally, we plan to increase third party capital to £25-30bn
(H1 2023: £16.8bn).
LGC's asset classes, which include Specialist Commercial Real Estate, Clean
Energy, Housing, and Alternative Finance, have all been selected given their
long-term need for capital. They offer compelling opportunities to attract
third party capital and meet the needs of co-investors and internal capital
sources.
We expect our existing platforms such as Pemberton and NTR to underpin our
ambitions for third party AUM, building on their impressive growth to-date,
but our newer platforms such as Ancora, ImpactA and Affordable Homes have the
capability to accelerate this in future.
· We are investing into the Specialist Commercial Real Estate
(SCRE) of the future in the UK and US, including laboratory and real estate
developments for the life sciences and technology sectors, and mixed-use
regeneration of towns and cities. These investments include significant
funding from LGRI. Our SCRE portfolio also includes an increasing focus on
Digital Infrastructure, which is critical for both corporations and
governments. Data management is one of the fastest growing sectors from a
structural perspective, and our state-of-the-art data centres are central to
meeting this increase in demand.
· In the Clean Energy sector, we are focused on investing selectively
into attractive growth equity and clean energy infrastructure opportunities.
We are confident that our selective approach to investing will continue to
yield positive results.
· LGC's significant Housing platform continues to expand, and make
further acquisitions across its broad tenure mix, including build to sell,
build to rent, social housing, shared ownership and later living. We are
well positioned to scale this platform further, in support of our long-term
ambitions. Whilst 2023 presents a more challenging outlook for the sector,
our multi-tenure, need-driven and diversified approach continues to provide
opportunities and we will continue to invest thoughtfully through the cycle.
· In Alternative Finance, we are continuing to support UK and
European innovation through two key areas. Firstly, through our growing GP
Investing platform, where we continue to work alongside ambitious,
impact-oriented alternative asset managers, and secondly, through our Venture
Capital business, where we continue to invest in the real economy and
technological innovation.
Our alternative asset strategies represent Inclusive Capitalism at work -
generating long-term value for shareholders and society.
Legal & General Investment Management (LGIM)
LGIM is a global asset manager with a diversified asset and client base,
underpinned by clear demand for our solutions-oriented approach. As the
asset manager for L&G, LGIM has structural advantages and plays a core
part in delivering the Group's successful synergistic business model,
including creating a pipeline of fully funded DB pension schemes for LGRI; the
origination and management of assets for the annuity portfolio and access to
third-party clients for LGC's alternative asset creation platform.
LGIM has grown organically to be one of the largest managers of corporate
pension funds globally. We are a UK leader in Defined Benefit (DB) pensions,
the UK's number-one Defined Contribution (DC) manager, consistently rank in
the top 4 in UK Wholesale 39 (#_edn31) and manage assets for many of the
largest corporate pension schemes in the US. Our strategy is to maintain our
strong position in the UK while deliberately broadening our reach
internationally.
2022 was a profoundly challenging year for all asset managers given the market
environment. We have seen a partial recovery in global equity markets in the
first half of 2023, however, this has been offset by further rises in interest
rates and inflation remains high in many developed economies.
Asset management is a long-term business, and we remain confident in our
strategy which positions LGIM for sustainable future growth. Our medium-term
ambition is underpinned by the three strategic pillars, to modernise,
diversify and internationalise:
Modernise: We are evolving the business, investing in our people, our platform
and our data capabilities to improve operating effectiveness and deliver scale
benefits. We are transforming our operating model, using State
Street/Charles River to build a global investment and middle office platform.
In H1 2023, we transferred 172 employees to State Street in advance of
completing the first phase of delivery.
Diversify: We are building on our core capabilities to improve business mix,
by selectively adding to our investment offering, with a focus on
higher-margin areas such as private markets and active fixed income. To meet
client objectives, we are increasingly integrating ESG into our investment
portfolios with around 88% of new pooled products developed for clients in
2023 being ESG-related.
Internationalise: LGIM aims to be an innovator in regions and countries where
our strengths align to client needs. Since 2018, LGIM's International AUM
has grown by 78%, $581bn (£457bn) - 39% of LGIM's total AUM. Our ambition
is to continue growing International AUM profitably and at pace in the US,
Europe and Asia.
Our approach to capital allocation
The Board believes it has considerable opportunities available to deliver
attractive returns to shareholders by retaining and investing capital within
the Group.
The Board will at the same time continually assess these investment
opportunities against the relative attractiveness of returning capital to
shareholders either through a buyback or a programme of buybacks.
If at any point the Board believes that capital would be best deployed in this
way, or if the Board believed it had surplus capital, it would not hesitate to
return capital to shareholders. Any incremental capital investment could also,
over time, increase the likelihood of these returns to shareholders.
Dividend
The Group's dividend policy states: "We are a long-term business and set our
dividend annually, according to agreed principles. The Board's intention for
the future is to maintain its progressive dividend policy, reflecting the
Group's expected medium-term underlying business growth, including measurement
of Capital generation and Adjusted operating profit."
The Board adopts a formulaic approach to the interim dividend which grows by
the same percentage as the total dividend for the prior year.
Consistent with our stated ambition to grow the dividend at 5% per annum to FY
2024, the Board has declared an interim dividend of 5.71p, up 5% from the
prior year (5.44p).
LGR - Institutional
FINANCIAL HIGHLIGHTS(1) £m H1 2023 H1 2022
Contractual service margin release 266 239
Risk adjustment release 54 68
Expected investment margin 213 139
Experience variances 1 9
Non-attributable expenses (66) (65)
Other 3 5
Operating profit 471 395
Investment and other variances (186) 17
Profit before tax attributable to equity holders 285 412
Contractual service margin (CSM) 7,843 7,207
Risk adjustment (RA) 623 854
Total stock of deferred profit(2) 8,466 8,061
New business CSM 402 331
New business RA 25 42
Total new business deferred profit(2) 427 373
UK PRT 4,866 3,715
International PRT 126 734
Total new business 4,992 4,449
Institutional annuity assets(3) (£bn) 55.5 59.5
1. This is the first time we are reporting under IFRS 17. Comparatives have
been restated accordingly. For further information please see Note 2.01.
2. Includes the new business CSM/RA uplift associated with the L&G pension
schemes' partial buy-in transaction in H1. In H2 we expect to move to a full
buy-out of the pension schemes.
3. In the UK, annuity assets across LGRI and Retail are managed together. We
show here LGRI estimated annuity assets.
Operating profit of £471m
LGRI continues to deliver strong operating profit of £471m, up 19% (H1 2022:
£395m).
Profit growth was underpinned by the release of CSM added by profitable new
business written in 2022 and H1 2023, and by the performance of our global
annuity portfolio, which included asset optimisation actions taken over H1.
Contractual Service Margin (CSM) release increased 11% to £266m (H1 2022:
£239m). The CSM release reflects the release of unearned insurance profits
as the insurance service is provided over time. The growth is supported by
profitable new business written in 2022 and H1 2023 and routine longevity
reserve releases in H2 2022. In H1 2023 3.3% of the closing CSM pre-release
(£8.1bn) has released into profit.
Risk Adjustment (RA) release of £54m (H1 2022: £68m). The RA reflects
compensation for taking non-financial risks. The RA is released if
experience plays out as expected over time.
Expected investment margin increased to £213m (H1 2022: £139m). The
expected investment margin incorporates the release of the prudence in the
discount rate, the expected returns on surplus assets and the impact of back
book asset optimisation actions taken over H1.
Non-attributable expenses of £66m (H1 2022: £(65)m). Reflects
non-attributable expenses i.e overheads, as the insurance liabilities reflect
only expenses deemed directly attributable to the insurance contract.
Profit before tax was £285m (H1 2022: £412m) predominantly impacted by
investment variances from the unrealised mark to market impact of higher rates
on our portfolio.
Good volumes at consistent SII & IFRS margins, adding £0.4bn of deferred
profit to the CSM and RA
During H1 2023, we wrote £5.0bn of global pension risk transfer (PRT) new
business across 20 deals (H1 2022: £4.4bn, 25 deals). UK volumes increased
31% to £4.9bn (H1 2022: £3.7bn) and international volumes were £0.1bn (H1
2022: £0.7bn).
Under IFRS 17, new business profits are now deferred to the CSM and RA on the
balance sheet and recognised in operating profit over the lifetime of the
contract. This associated volume added £0.4bn of deferred profit to the CSM
and RA(8), contributing to the growth of the CSM over H1 2023.
The £4.9bn of UK PRT delivered an 8.0% UK Solvency II new business margin (H1
2022: 8.7%) in line with our long-term average.
We continue to be disciplined in our pricing and deployment of capital. We
operate a capital light business and have successfully executed transactions
over the last few years at strains comfortably below our 4% target. In H1
2023, overall PRT capital strain was just over 2%.
Successful execution in the UK over H1 2023
The UK market saw significant activity in H1. There has been a step-up in
the number of pension schemes approaching the insurance market alongside an
increase in £1bn+ transactions, with several such pension schemes intending
to complete transactions this year. The global pipeline for 2023 is the
largest we have seen, and we are predicting record PRT market volumes for the
full year. We are well-placed to capitalise on this opportunity. We have
been proactive in managing the levels of capital deployment, including use of
reinsurance, to generate strong margins over time.
LGRI's brand, scale and asset origination capabilities - through synergies and
expertise within LGIM and LGC - are critical to our market leadership in the
UK PRT market. Long-term client relationships, typically created and
fostered by LGIM, have allowed us to help many pension plans achieve their
de-risking goals. In H1 2023, we demonstrated our market leadership and
solutions capabilities by writing a series of innovative transactions,
including:
· c£2.7bn follow-on transaction with the British Steel Pension Scheme,
executed under an umbrella agreement. Legal & General has now insured
£7.5bn of the scheme's liabilities and, in doing so, the scheme becomes the
largest pension scheme in the UK to have fully insured all its members'
benefits.
· c£1.0bn conversion to buy-in of the Assured Payment Policies (APP)
held by Legal & General's Group UK Pension and Assurance Fund and Legal
& General's UK Senior Pension Scheme. This is expected to move to a full
buy-out in H2.
· A continued flow of small scheme solutions. With 74% of our
transactions falling into this category, we leverage technological innovation
to serve smaller pension plans efficiently.
Well positioned to execute in H2 in the US and International markets; largest
ever US deal in July
LGRI delivered US PRT new business premiums of $163m (H1 2023: £126m, H1
2022: $729m; £593m) in a market that is typically slower over H1. This
included a transaction that secured the pension benefits of more than 4,000
retirees and beneficiaries.
In July, we completed our largest ever US transaction for c$790m, followed by
a further c$200m deal in August. We are actively pricing in the Canadian and
Dutch markets too.
As the only insurer providing PRT to pension plans globally, Legal &
General is uniquely positioned to offer holistic, multinational pension
de-risking solutions.
Retail Division
FINANCIAL HIGHLIGHTS(1) £m H1 2023 H1 2022
Contractual service margin release 210 206
Risk adjustment release 49 44
Expected investment margin 49 38
Experience variances (26) (11)
Non-attributable expenses (39) (43)
Insurance profit 243 234
Other (Non-insurance profit) (13) 61
Operating profit 230 295
- US/UK Insurance(2) 108 164
- Retail Retirement(3) 122 131
Investment and other variances (86) 57
Profit before tax attributable to equity holders 144 352
Contractual service margin (CSM) 4,509 4,339
Risk adjustment (RA) 861 1,011
Total stock of deferred profit 5,370 5,350
New business CSM 163 158
New business RA 13 18
Total new business deferred profit 176 176
Protection new business annual premiums 199 196
Individual annuities single premium 575 453
Workplace Savings net flows(4) (£bn) 3.0 4.3
Lifetime & Retirement Interest Only mortgage advances 163 338
Retail retirement annuity assets(5) (£bn) 17.1 19.3
UK Retail protection gross premiums 752 740
UK Group protection gross premiums 295 291
US protection gross premiums 633 574
Total protection gross premiums 1,680 1,605
Protection New Business Value 85 92
Annuities New Business Value 34 32
Solvency II New Business Value 119 124
1. This is the first time we are reporting under IFRS
17. Comparatives have been restated accordingly. For further information
please see Note 2.01.
2. UK Insurance includes Retail Protection, Group
Protection, Fintech and Mortgage Services.
3. Retail Retirement includes Individual Annuities,
Lifetime mortgages, Workplace Admin, Personal Investing and Advice.
4. This represents the Workplace Savings
administration business. Profits on the fund management services we provide
are included in LGIM's asset management operating profit.
5. In the UK, annuity assets across LGRI and Retail
are managed together. Estimated proportion of annuity assets belonging to
Retail Retirement.
Operating profit of £230m
During the first half of 2023, Retail operating profit was £230m (H1 2022:
£295m). Whilst insurance operating profit is up 4% (H1 2023: £243m, H1 2022:
£234m) driven by resilient on-going profit releases in the UK and US, total
operating profit is down given the lower contribution from Fintech (reflected
in "Other" above), as valuation uplifts from H1 2022 did not repeat. In the
US, mortality experience continued to be elevated but lower relative to the
prior year. We have fully utilised the $40m provision established at FY2022.
Contractual Service Margin (CSM) release increased 2% to £210m (H1 2022:
£206m). The CSM release reflects the release of previously unearned insurance
profits as the insurance service is provided over time. In H1 2023 4.6% of the
closing CSM pre-release (£4.7bn) has released into profit.
Risk Adjustment (RA) release of £49m (H1 2022: £44m). The RA reflects
compensation for taking non-financial risks. The RA is released if experience
plays out as expected over time.
Expected investment margin increased to £49m (H1 2022: £38m). This
incorporates the release of the prudence in the discount rate, the expected
returns on surplus assets and the impact of back book asset optimisation
actions taken within the annuity portfolio over H1.
Experience variances of £(26)m (H1 2022: £(11)m). This primarily reflects
higher UK death rates in Q1 on the minority of business where we are not fully
reinsured and also includes £8m of onerous contract unwind on legacy
policies.
Non-attributable expenses of £(39)m (H1 2022: £(43)m). Reflects
non-attributable expenses i.e overheads, as the insurance liabilities reflect
only expenses deemed directly attributable to the insurance contract.
Profit before tax was £144m (H1 2022: £352m) predominantly impacted by
investment variances from the unrealised mark to market impact of higher rates
on our annuity portfolio and the write-down of our investment in Onto.
Solvency II New Business Value decreased by £5m to £119m (H1 2022: £124m)
with growth in Retail Annuities and US protection being offset by lower
margins in UK protection due to higher interest rates and lower new business
volumes. We continue to operate with a focus on disciplined pricing and on
maintaining strong distribution channels.
Navigating a competitive landscape in H1
UK Retail protection gross premium income increased to £752m (H1 2022:
£740m), with new business annual premiums of £76m (H1 2022: £85m) in what
is an increasingly competitive market. L&G continues to lead this market
with a share of 19.4% 40 (#_edn32) , delivering a point-of-sale decision for
more than 80% of our customers.
UK Group protection gross premium income increasing 1% to £295m (H1 2022:
£291m) thanks to strong retention and new business annual premiums of £53m
(H1 2022: £63m). Our online "quote and apply" platform for smaller schemes
continues to perform well, processing 4,512 new clients over the first half of
the year (H1 2021: 3,308) and we continue to see growth in this part of the
market. Group Protection supported 1,512 members of income protection schemes
to return to work during the first half of the year.
US protection (LGIA) new business annual premiums increased 40% to $87m (H1
2022: $62m), with strong new business margins of 11.2% (H1 2022: 10.7%). Gross
written premiums increased 5% (up 10% on a sterling basis, benefiting from FX
movements) to $781m (H1 2022: $746m). Our digital new business platform,
Horizon, is making it easier for customers and their advisors to apply and buy
our term products. This is driving up our market share: LGIA ranked number one
in the independent channel in the first quarter and grew to number three in
overall US term market share. We expect to drive further sales growth and to
reduce unit costs over the coming years. Over two thirds of new business is
now submitted through our Horizon platform.
Legal & General Mortgage Club facilitated £48bn of mortgages, (H1 2022:
£50bn) reflecting reduced demand in the mortgage market due to higher
interest rates. We remain the largest participant in the UK intermediated
mortgage market and are involved in around one in five of all UK mortgage
transactions. Our Surveying Services business facilitated just under 172,000
surveys and valuations (H1 2022: 276,000). Since buying a new house is often
a catalyst for purchasing life insurance, the Legal & General Mortgage
Club is a supporting component of our overall offering to customers.
Retail annuity sales were £575m (H1 2022: £453m). Fixed term annuity
("FTA") sales were particularly strong and make up the largest proportion of
new business growth. Customers who might have previously moved into drawdown
are choosing FTA's given improved annuity prices as a result of the higher
interest rate environment, and we expect ongoing growth in this market as a
result.
Lifetime mortgage advances, including Retirement Interest Only mortgages, were
£163m (H1 2022: £338m) reflecting a decline in demand related to higher
interest rates. Throughout this period we have maintained pricing and
underwriting discipline.
Workplace Savings net flows were £3.0bn (H1 2022: £4.3bn), down year on
year, but positive as a result of continued client wins and increased
contributions. Workplace pension platform members increased to 5.0 million
in H1 2023. We are continuing to focus on improving efficiency and
scalability as the business grows.
Legal & General Capital (LGC)
FINANCIAL HIGHLIGHTS £m H1 2023 H1 2022
Operating profit 296 263
- Alternative asset portfolio 230 202
- Traded investment portfolio & Treasury 66 61
Investment and other variances(2) (192) (308)
Profit before tax attributable to equity holders(2) 104 (45)
ALTERNATIVE ASSET PORTFOLIO £m
Specialist commercial real estate 761 662
Clean energy 345 199
Residential property 2,246 2,190
Alternative Finance 868 688
4,220 3,739
TRADED ASSET PORTFOLIO £m
Equities 1,052 1,714
Fixed income 222 66
Multi-asset 155 199
Cash(1) 1,374 1,285
2,803 3,264
LGC investment portfolio 7,023 7,003
Treasury assets at holding company 901 1,247
Total 7,924 8,250
1. Includes short term liquid holdings
2. Excludes costs relating to the announced Modular Homes closure
Total operating profit increased 13% to £296m
LGC operating profit increased 13% to £296m 41 (#_edn33) (H1 2022: £263m)
reflecting a strong contribution from our alternative asset portfolio of
£230m (H1 2022: £202m).
Profit before tax(2) was £104m, with investment and other variances of
£(192)m, which is most notably driven by the impact of higher interest rates
on the LGC portfolio.
Alternative asset portfolio grew 13% to £4.2bn
LGC has continued to strengthen its capabilities across a diversified range of
alternative assets that are underpinned by structural growth drivers. Our
alternative asset portfolio increased to £4,220m (H1 2022: £3,739m) as we
deployed a further £0.3bn into new and existing investments. Through these
investments, we originate assets that generate returns for shareholders,
create attractive Matching Adjustment (MA)-eligible assets for our annuity
portfolio, and supply attractive alternative assets to third-party clients.
Specialist commercial real estate: supporting the levelling up agenda through
strategic partnerships
Across the UK and US, we are investing in Specialist Commercial Real Estate
(SCRE), including laboratory and real estate developments for the life
sciences and technology sectors, mixed-use regeneration for towns and cities
(such as through our £4bn partnership with Oxford University), and digital
infrastructure for data warehousing and computer processing.
In H1 2023, Kao Data, our wholesale data centre platform, has continued to
develop its existing three sites as well as announcing a new site in
Manchester which will be powered by 100% renewable energy. Through Bruntwood
SciTech, the UK's leading innovation, science and technology focused platform,
we have continued to develop world-leading diagnostic and life sciences
infrastructure. This year, the partnership announced a £1.7bn Strategic
Regeneration Framework with the University of Manchester, to deliver a
mixed-use city centre innovation district. Our 50:50 partnership with US
real estate developer and asset manager, Ancora, continues to grow with 3
sites now planned, which are dedicated to driving life sciences, research and
technology growth in North America. In summer 2023, Ancora L&G expects
to begin construction on a life sciences centre in Providence, Rhode Island,
providing 80,000 sq ft of world-class research space for the Rhode Island
Department of Health.
Our Clean Energy portfolio expanded into new sectors
Supporting the Group's ambitions to address climate change and deliver
shareholder returns, we invest in early-stage innovative clean technology
companies and clean energy infrastructure which are needed to meet UK and
global UN climate targets and Sustainable Development Goals.
In our growth equity portfolio, Kensa, our ground source heat pump provider
has made significant progress. In December 2022, Kensa opened the UK's
largest production facility dedicated to ground source heat pumps, increasing
output by 50%. In May 2023, the business announced a partnership with
Octopus Energy, which provided an additional £70 million investment. Kensa
is now the country's leading manufacturer and installer of ground source heat
pumps.
In our clean energy infrastructure portfolio, we continue to deploy
significant capital into new and existing renewable energy projects across
wind, solar and battery storage, creating opportunities for our annuity
business and for third party investment. As part of this deployment, LGC
provided seed capital to support the first close of L&G NTR Clean Power
Fund, which raised €390 million in April 2023, putting private capital to
work to drive Europe's decarbonisation and energy security agenda.
We also have a substantial pipeline of new investment opportunities across
several geographies, including energy storage, electric vehicle technology and
renewables, and expect to accelerate our pace of deployment into the sector in
coming years.
Housing: Multi tenure platform continues to generate a profitable return
LGC continues to scale up its delivery across all housing tenures.
Diversified across affordability and life stages, LGC's investments meet the
UK's long-term social and economic need for quality housing for all
demographics. During H1 2023, our housing portfolio grew to £2,246m (H1
2022: £2,190m) reflecting sustained long-term demand for our offering.
LGC's Build to Sell business, Cala, has continued to perform well over H1
2023, in the face of a challenging market. Having grown to become the 10(th)
largest housebuilder in the UK by revenue, in H1 2023 Cala delivered
residential house sale revenue of £619m (H1 2022: £619m) and profit before
tax of £73m (H1 2022: £98m) through the sale of 1,428 units (H1 2022: 1,527
home completions). Reservations on private units currently stand at 75% of
the full year, providing confidence in the delivery of Cala's FY 2023 targets.
Our Affordable Homes business has continued to establish itself as one of the
UK's leading institutional developers and managers of affordable housing, with
a total operational pipeline of 6,766 and a Gross Asset Value of around
£1.2bn. The business is well placed to create opportunities both for our
annuity portfolio and for third party investors.
Growth in our Inspired Villages business has continued into 2023, driven by
the partnership with NatWest Group Pension Fund. Our Later Living platform
has made good planning and development progress, and Inspired Villages is on
track to deliver over 5,000 homes for older people over the life of the
partnership.
In H1 2023, we reluctantly announced our intention to cease production at our
Modular Homes factory. Unfortunately, long planning delays mean that we have
not been able to secure the necessary scale in our pipeline.
Accelerating the growth of private asset managers through Alternative Finance
By investing in the real economy and technological advancements through our
General Partners (GP) Investing and Venture Capital platforms, we are
continuing to support growth businesses and deliver enhanced returns, whilst
boosting job creation and innovation.
Through partnerships such as those with Pemberton, NTR and ImpactA, we are
accelerating the growth of mid-size private asset managers, providing
institutional rigour and a network of relationships.
We continue to support UK and European mid-market lending through our GP
investment in Pemberton, a leading European credit manager, in which we hold a
40% stake. The Pemberton platform has raised over €17.5bn (H1 2022:
€14.9bn) from 187 investors globally across seven strategies since we first
invested in 2014. In H1 2023 it delivered €52m in revenue (H1 2022: €45m).
As the market evolves, Pemberton continues to innovate and add new products to
its platform. In 2022 Pemberton launched NAV Financing, which will provide
financing solutions to private equity funds' performing investment portfolios
and the Risk Sharing Strategy, which will invest in junior tranches of loan
portfolios originated by global banks. These follow the launch of the Working
Capital Finance strategy which hit the $1billion of committed funds milestone
in Feb 2023.
In March 2023, we invested in ImpactA Global, a new women-led Impact asset
management firm. ImpactA Global will provide debt financing for sustainable
infrastructure projects helping to bridge funding gaps in transformational
projects and unlock critical investment to drive climate transition and reduce
inequalities in emerging markets. LGC intends to provide up to $100m in
cornerstone capital to ImpactA's inaugural fund.
Our Venture Capital funds portfolio supports the growth of over 600
early-stage companies. The university spin-out market is an area of
particular focus for us, where we are able to leverage our long-standing
relationships with the UK's leading research institutions to help create the
outstanding businesses of the future.
Legal & General Investment Management (LGIM)
FINANCIAL HIGHLIGHTS £m H1 2023 H1 2022
Management fee revenue 431 485
Transactional revenue 9 9
Total revenue 440 494
Total costs (298) (294)
Operating profit 142 200
Investment and other variances (11) (7)
Profit before tax 131 193
Asset Management cost:income ratio (%) 68 59
NET FLOWS AND ASSETS £bn
External net flows (12.3) 65.6
- Of which External net flows excluding UK DB solutions(3) 7.4 40.3
PRT Transfers (5.1) (0.4)
Internal net flows (1.9) (0.5)
Total net flows (19.3) 64.7
- Of which international(1) (2.7) 34.5
Persistency 42 (#_edn34) (%) 87 91
Average assets under management 1,180 1,361
Assets under management as at 30 June 1,158 1,290
Of which:
- International assets under management(2) 457 468
- UK DC assets under management 146 130
1. International asset net flows are shown on the
basis of client domicile.
2. International AUM includes assets from
internationally domiciled clients plus assets managed internationally on
behalf of UK clients.
3. Derivative overlays associated with UK DB net
flows.
Operating profit of £142m, reflecting higher interest rates
Operating profit of £142m (H1 2022: £200m) reflects the impact of higher
interest rates on assets under management, and therefore revenues, and is in
line with H2 2022 (£140m). Despite significant inflationary pressure, we
have taken action to keep absolute costs flat on an FX-adjusted basis.
Assets under management (AUM) decreased by 10% to £1,158.1bn (H1 2022:
£1,289.7bn), reflecting the impact of market conditions and external net
outflows over H1 2023 of £(12.3)bn (H1 2022: inflows of £65.6bn). This
includes £19.7bn of overlay net flows relating to our UK DB Solutions
business(3), which is a partial reversal of positive flows in 2022, where we
supported clients to achieve more efficient hedging strategies as part of
preparing for 'Endgame' de-risking solutions. Excluding UK DB Solutions(3),
LGIM delivered positive external net flows of £7.4bn with a continued focus
on higher-margin capabilities, generating £8.4m of annualised net new revenue
(ANNR) in respect of net flows into ETF, Multi-Asset and Real Assets.
Management fee revenue decreased by 11% to £431m (H1 2022: £485m).
Transactional revenue was robust at £9m (H1 2022: £9m) including execution
fees from hedging activity and performance fees. The decrease in management
fees is primarily linked to rising interest rates, particularly in the UK,
which caused average AUM to fall by 13% over the past year.
We are maintaining a disciplined approach to cost management whilst continuing
to invest deliberately and for the long-term. We took expense actions over
H1 2023, including selective reshaping of the workforce and restraint on
recruitment and variable compensation to combat the impact of higher inflation
and market movements on revenue. Costs of £298m in H1 2023 were flat on an
FX-adjusted basis compared to H1 2022 (£294m).
Expanding our global footprint with International AUM of £457bn
We are successfully building internationally, with international AUM having
grown by 78% since 2018 to £457bn, 39% of AUM. Our goal is for
International AUM to represent more than half of our total AUM by the end of
this decade.
We are a leading corporate pension manager in the US, working with clients to
devise pensions de-risking strategies. We have refocused our index
capabilities efforts on Index Solutions and have seen early success with
$6.7bn in higher margin Index Plus mandates in H1. We are adding to
securitised capabilities to broaden our Fixed Income offering and are building
a real estate equity platform for the US market, creating a significant
opportunity to mirror our success in the UK and provide a broader range of
de-risking opportunities for our DB clients.
In Europe, our growth is being led by expertise in ETFs, Active Fixed Income
and responsible investing. We have expanded the number of relationships with
clients, consultants and intermediaries in our core markets of Germany, Italy,
Switzerland and the Nordics, and have opened an office in Zurich. Our AUM
across mainland Europe is £68.7bn.
This year, we have opened an office in Singapore to serve south-east Asian
clients, onboarded our first client in Thailand and are expecting new mandates
in Korea and Taiwan to fund in H2 2023. In Japan our AUM has more than
doubled since 2019 and we are now Japan's 7(th) largest asset manager. 43
(#_edn35) Our AUM in Asia and Japan has reached $167bn and we now have
clients across 9 countries in the region.
Supporting our institutional defined benefit clients achieve 'Endgame'
objectives
In UKDB, we are supporting c2,000 clients to achieve their 'Endgame'
objectives. Many are likely to choose LGRI as a pension risk transfer
partner. An example of this is the British Steel Pension Scheme, which took
its final step in fully reinsuring the £7.5bn of pension liabilities with
LGRI via a £2.7bn buy-in. In H1 2023 79% of LGRI UK PRT transactions were
with LGIM clients. In the US, improved funding ratios due to higher interest
rates have increased demand for customised liability hedging strategies.
We are well positioned to support our global DB clients by delivering
capabilities to help them manage their illiquid portfolios, to implement
effective hedging strategies and to manage matching asset portfolios as they
prepare for 'Endgame'. With over 75% of defined benefit pension schemes now
recognising buy-out as their likely ultimate end-state, we expect to grow AUM
and profits from providing these asset management services. As the UK DB
market continues to consolidate, we are also supporting clients who are not
yet fully funded by developing an enhanced proposition, ensuring that their
assets are managed with a view to achieving their 'Endgame' goals.
Ongoing strength in Defined Contribution
The Defined Contribution (DC) business continues to attract new assets, with
external net flows of £5.5bn, supported by the ongoing growth in Retail's
Workplace pension business, which now has 5.0 million members. Annualised
net new revenue was £6.5m and total UK DC AUM is £146bn (H1 2022:
£130bn). This success is underpinned by LGIM's strong customer focus and
innovative product proposition, as shown by a 93% persistency rate among our
DC customers.
L&G also has one of the largest and fastest-growing UK Master Trusts,
which now has £22.1bn of AUM, making it the first commercial Master Trust to
surpass £20bn of assets under management. The growth reflects the
increasing appeal of the structure for DC plans wishing to outsource their
governance, investment and administration. Our UK Master Trust supports
growth in Multi-Asset flows: this is the default option for many of our
clients. Our ability to offer investors an integrated blend of high-quality
investment solutions, pensions administration and Master Trust governance is a
significant source of competitive advantage. In June, L&G's Master Trust
won the coveted Corporate Advisor award for Best Master Trust for the third
year in a row.
Accelerating growth in Global Wholesale
In UK Wholesale, we achieved our highest ever gross sales and ranked 2(nd)
over H1 2023. 44 (#_edn36) Our Strategic Bond Fund attracted strong
inflows in the period totalling £200m demonstrating our strong Fixed Income
credentials. Higher margin Multi-Asset funds now have over £10.5bn in AUM
from UK retail investors. We continued to expand our Model Portfolio Service
(MPS), further extending the successful Multi-Asset proposition into the
maturing advisory market.
A key driver of our Global Wholesale growth strategy is our ETF products which
continue to perform well. Since acquisition of the ETF business in 2018,
revenue has more than tripled. The range has continued to show resilience,
against a challenging backdrop, with $1.2bn of external net flows in H1 2023
delivering an annualised net new revenue of $1.5m. LGIM is ranked second on
AUM in the European thematic ETF market. Our diversified range consisting of
Equity Thematic, Fixed Income, and Commodities ETFs has supported our strategy
of growth into higher-margin areas. We are deepening our retail footprint in
Germany through a partnership with Gerd Kommer Invest and recently launched
our first co-branded ETF to provide broad diversified multi-factor exposure to
global equities. In May, we announced a partnership with Widiba Bank in
Italy, who are now distributing our thematic ETFs through their financial
advisor network. Our targeted product pipeline for H2 continues to focus on
thematic investments, climate and energy transition.
Building a Real Assets Platform
Real Assets saw total net flows of £1.5bn (H1 2022: £0.7bn) driven by
£2.1bn of Private Credit transactions of which the majority support LGRI's
PRT proposition. Private Credit AUM reached £17.0bn 45 (#_edn37) in H1
2023 and we expect it to be core to future growth in flows as clients seek
diversification of secure income and value protection. UK DB investors are
now accessing these capabilities through our successful SIAF and STAFF private
credit funds 46 (#_edn38) , and DC investors are also starting to show
interest in our illiquid strategies.
Our Real Estate and Infrastructure Equity platform continues to grow with AUM
of £19.7bn(34). In H1 2023 we raised €390m in the first close of the
Clean Power (Europe) Fund working in partnership with NTR. We have hired a
team in the US to focus on real estate markets where we see potential. Our
property fund for UK retail investors is one of the market leaders with over
£1.3bn of AUM. Our strategy is to externalise capabilities that we have
built in collaboration with other parts of L&G.
Investment performance
40% of revenue comes from actively managed funds. The relative performance
of our UK-managed Active Fixed Income strategies was strong with 64% of
strategies out-performing over 1 year, 87% of strategies out-performing over 3
years and 84%(( 47 (#_edn39) )) over 5 years. US-managed Active Fixed
Income strategies have also performed well with 73% of strategies
out-performing over 1 year, 83% of strategies out-performing over 3 years and
64% over 5 years. Multi-Asset strategies outperformed by 79% over 1 year,
54% over 3 years and 75% over 5 years. 48 (#_edn40) Within Private
Markets, 86% 49 (#_edn41) of our Real Estate Equity funds have outperformed
over 3 years and our Private Credit performance remains strong.
Leading in responsible investing
We are an active steward of our clients' assets and are committed to raising
standards in addressing the environmental and social challenges arising from a
rapidly changing world. As at 30th June 2023, LGIM managed £331.6bn (H1
2022: £271.2bn) in responsible investment strategies explicitly linked to ESG
criteria for a broad range of clients. 50 (#_edn42)
ESG innovation continues to be core to our product agenda. We have recently
launched the Future World ESG Developed Fossil Fuels Exclusion Index Fund,
developed in collaboration with the National Trust, the largest conservation
charity in Europe. H1 also saw the launch of a Global Diversified Credit
fund aligned to the UN's Sustainable Development Goals, and a suite of Net
Zero, Paris Aligned and bespoke ESG exclusion funds helping clients meet their
own climate commitments.
As responsible investors, LGIM aims to vote every share that we hold and
publish our voting activities on our dedicated website.(( 51 (#_edn43) ))
We rate around 17,000 companies through our proprietary scoring system, the
LGIM ESG Score, and capture over 5,000 companies across 20 climate critical
sectors within our flagship corporate engagement programme, the Climate Impact
Pledge. We are active collaborators with our peers through global
organisations such as the CA100+ and the IPDD (Investors Policy Dialogue on
Deforestation). LGIM recently won the Sustainability Provider of the Year
Award at the Pensions Age awards. This year we have added dedicated
Investment Stewardship resources in Asia for the first time, as our reach and
influence continue to expand globally.
Borrowings
The Group's outstanding core borrowings totalled £4.3bn at 30 June 2023 (FY
2022: £4.3bn; H1 2022: £4.4bn). There is also a further £1.3bn (FY 2022:
£1.2bn; H1 2022: £1.2bn) of operational borrowings including £1.1bn (FY
2022: £1.0bn; H1 2022: £1.0bn) of non-recourse borrowings.
Group debt costs of £106m (H1 2022: £108m) reflect an average cost of debt
of 4.7% per annum (H1 2022: 4.9% per annum) on an average nominal value of
debt balances of £4.5bn (H1 2022: £4.5bn).
Taxation
Equity holders' Effective Tax Rate (%) H1 2023 H1 2022
Equity holders' total Effective Tax Rate 4.3 17.5
Annualised rate of UK corporation tax 23.5 19
The H1 2023 effective tax rate reflects the different rates of taxation that
apply to Legal & General's overseas operations.
Solvency II
As at 30 June 2023, the Group had an estimated Solvency II surplus of £9.2bn
over its Solvency Capital Requirement, corresponding to a Solvency II coverage
ratio of 230%.
H1 2023 2022
Capital (£m)
Own Funds 16,197 17,226
Solvency Capital Requirement (SCR) (7,036) (7,311)
Solvency II surplus 9,161 9,915
SCR coverage ratio (%) 230 236
Solvency II Own Funds Solvency II SCR Solvency II Surplus
Analysis of movement from 1 January 2023 to 30 June 2023(1) (£m)
Operational surplus generation 835 112 947
New business strain 188 (383) (195)
Net surplus generation 1,023 (271) 752
Operating variances( ) (543)
Mergers, acquisitions and disposals (150)
Market movements 18
Subordinated debt -
Dividends paid (831)
Total surplus movement (after dividends paid in the period) (1,029) 275 (754)
1. Please see disclosure note 6.01(c) for further detail.
Operational surplus generation was level at £947m (H1 2022: £946m), after
allowing for amortisation of the opening Transitional Measures on Technical
Provisions (TMTP) and release of Risk Margin.
New business strain was £(195)m, primarily reflecting PRT volumes written at
a capital strain of just over 2%. This resulted in net surplus generation of
£752m (H1 2022: £825m).
Dividends paid represent the payment of the 2022 final dividend in June 2023,
which is the larger of the two dividends paid during the year.
Operating variances include the impact of experience variances, changes to
assumptions and management actions. The net impact of operating variances
over the period was negative and predominantly reflects timing differences
which we expect to reverse in H2 (e.g. the execution of external and
intragroup reinsurance).
Market movements of £18m primarily reflect the impact of rising rates on the
valuation of our balance sheet, partially offset by other, smaller variances
such as credit spread dispersion in sub-investment grade assets, exchange
rates, inflation and property.
The movements shown above incorporate the impact of recalculating the TMTP as
at 30 June 2023.
Sensitivity analysis(2)
Impact on net of tax Solvency II capital surplus Impact on net of tax Solvency II coverage ratio
H1 2023 H1 2023
£bn %
100bps increase in risk-free rates 0.3 15
100bps decrease in risk-free rates (0.4) (16)
Credit spreads widen by 100bps assuming an escalating addition to ratings 0.4 13
Credit spreads narrow by 100bps assuming an escalating addition to ratings (0.6) (17)
Credit spreads widen by 100bps assuming a flat addition to ratings 0.4 14
Credit spreads of sub-investment grade assets widen by 100bps assuming a level (0.2) (7)
addition to ratings
Credit migration (0.7) (10)
25% fall in equity markets (0.4) (3)
15% fall in property markets (0.9) (11)
50bps increase in future inflation expectations (0.1) (4)
Substantially reduced Risk Margin 0.6 8
2. Please see disclosure 6.01 (f) for further details.
The above analysis does not reflect all possible management actions which
could be taken to reduce the impact of each sensitivity due to the complex
nature of the modelling. In practice, the Group actively manages its asset
and liability positions to respond to market movements. Other than in the
interest rate and inflation stresses, we have not allowed for the
recalculation of TMTP. 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.
The impacts of credit spreads and risk-free rate sensitivities are primarily
non-economic arising from movements in balance sheet items that result from
changes in the discount rates used to calculate the value of assets and
liabilities. The credit migration stress, in the absence of defaults, delays
the emergence of operating surplus generation, but does not reduce the actual
quantum of future releases. Similarly, equity and property stresses only
result in losses if assets are sold at depressed values.
Solvency II new business contribution
Management estimates of the present value of new business (PVNBP) and the
margin as at 30 June 2023 are shown below(1):
£m PVNBP Contribution from Margin %
new business
LGRI - UK annuity business 4,050 326 8.0
Retail Retirement - UK annuity business 575 34 5.9
UK Protection Total 621 17 2.8
US Protection 605 68 11.2
The key economic assumptions as at 30 June 2023 are as follows:
%
Margin for risk 4.1
Risk-free rate
- UK 3.9
- US 3.8
Risk discount rate (net of tax)
- UK 8.0
- US 7.9
Long-term rate of return on non-profit annuities 5.5
1. Please see disclosure 6.02 for further details.
The future earnings are discounted using duration-based discount rates, which
is the sum of a duration-based risk-free rate and a flat margin for risk. The
risk-free rates have been based on a swap curve net of the PRA-specified
Credit Risk Adjustment. The risk-free rate shown above is a weighted average
based on the projected cash flows.
Other than updating for recent experience, all other economic and non-economic
assumptions and methodologies that would have a material impact on the margin
for these contracts are unchanged from those previously used by the group for
its European Embedded Value reporting, other than the cost of currency hedging
which has been updated 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 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. The risks are expected to remain
applicable for the remaining six months of the year.
RISKS AND UNCERTAINTIES TREND, OUTLOOK AND MITIGATION
Investment market performance and conditions in the broader economy may We cannot eliminate the downside impacts on our earnings, profitability or
adversely impact earnings, profitability, or surplus capital. surplus capital from investment market volatility and adverse economic
conditions, although we seek to position our investment portfolios and wider
business plans for a range of plausible economic scenarios and investment
market conditions to ensure their resilience across a range of outcomes. This
The performance and liquidity of financial and property markets, interest rate includes setting risk limits on exposures to different asset classes and where
movements and inflation impact the value of investments we hold in hedging instruments exist, we seek to remove interest rate and inflation risk
shareholders' funds and to meet the obligations from insurance business; the on a financial reporting basis.
movement in certain investments directly impacts profitability. Interest rate
movements and inflation can also change the value of our obligations and
although we seek to match assets and liabilities, losses can still arise from
adverse markets. Falls in the risk-free yield curve can also create a greater Our ORSA is integral to our risk management approach, supporting assessment of
degree of inherent volatility to be managed in the Solvency II balance sheet, the financial impacts of risks associated with investment market volatility
potentially impacting capital requirements and surplus capital. Falls in and adverse economic scenarios for our Solvency II balance sheet, capital
investment values can reduce our investment management fee income. sufficiency, and liquidity requirements.
The global economic outlook remains highly uncertain with potential for a
sustained period of very low growth and elevated levels of inflation,
particularly in the UK. Asset values remain susceptible to reappraisal should
the current economic outlook deteriorate, as well as from a range of
geo-political factors including the on-going war in Ukraine and potential
further ruptures in the US-China relationship. The UK commercial property
markets continued to reflect the broader uncertainty in the economic outlook.
Within our construction businesses supply chain, cost inflation and labour
shortages also continue to present risk.
There are questions on the efficacy of traditional monetary policy
transmission mechanisms in lowering inflation. As a result, there is a danger
that excessive central bank rate rises lead to significant unintended damage
to the wider economy including through reduced consumer spending and pressure
on residential property markets.
In dealing with issuers of debt and other types of counterparty, the group is We manage our exposure to downgrade and default risks within our bond
exposed to the risk of financial loss. portfolios, through setting selection criteria and exposure limits, and using
LGIM's global credit team's capabilities to ensure risks are effectively
controlled, where appropriate trading out to improve credit quality. In our
property lending businesses, our loan criteria take account of borrower
Systemic corporate sector failures, or a major sovereign debt event, could, in default and movements in the value of security. We manage our reinsurer
extreme scenarios, trigger defaults impacting the value of our bond exposures with the vast majority of our reinsurers having a minimum A- rating,
portfolios. Under Solvency II, a widespread widening of credit spreads and setting rating-based exposure limits, and where appropriate taking collateral.
downgrades can also result in a reduction in our Solvency II balance sheet Similarly, we seek to limit aggregate exposure to banking, money market and
surplus, despite already setting aside significant capital for credit risk. We service providers. Whilst we manage risks to our balance sheet, we can never
are also exposed to default risks in dealing with banking, money market and eliminate downgrade or default risks, although we seek to hold a strong
reinsurance counterparties, as well as settlement, custody, and other bespoke balance sheet that we believe to be prudent for a range of adverse scenarios.
business services. Default risk also arises where we undertake property
lending, with exposure to loss if an accrued debt exceeds the value of
security taken.
The risk of credit default increases in periods of low economic growth, and we
continue to closely monitor the factors that may lead to a widening of credit
spreads including the outlook for interest rates. A sustained period of
elevated inflation, reducing real incomes, will particularly impact economic
activity in sectors reliant on discretionary spending. The UK owner-occupied
residential property market is also showing signs of weaker confidence, and we
continue to carefully monitor the medium to long term outlook.
RISKS AND
UNCERTAINTIES
TREND, OUTLOOK AND MITIGATION
We fail to respond to the emerging threats from climate change for our We recognise that our scale brings a responsibility to act decisively in
investment portfolios and wider businesses. positioning our balance sheet to the threats from climate change. We continue
to embed the assessment of climate risks in our investment process, including
in the management of real assets. We measure the carbon intensity targets of
our investment portfolios, and along with specific investment exclusions for
As a significant investor in financial markets, commercial real estate and carbon intensive sectors, we have set overall reduction targets aligned with a
housing, we are exposed to climate related transition risks, particularly 1.5°C interpretation of the Paris Agreement, including setting near term
should abrupt shifts in the political and technological landscape impact the science-based targets and a transition plan to support our long-term emission
value of those investment assets associated with higher levels of greenhouse reduction goals. Alongside managing exposures, we closely monitor the
gas emissions. Our interests in property assets may also expose us to physical political and regulatory landscape, and as part of our climate strategy we
climate change related risks, including flood risks. We are also exposed to engage with regulators and investee companies in support of climate action. As
reputation and climate related litigation risks should our responses to the we change how we invest, the products and services we offer, and how we
threats from climate change be judged not to align with the expectations of operate, we are also mindful of the need to ensure that we have the right
environment, social and governance (ESG) groups. Our risk management approach skills for the future.
is also reliant upon the availability of verifiable consistent and comparable
emissions data.
We are increasingly building in the potential physical impacts of climate
change on both assets and liabilities into our modelling and projections work.
The impacts of climate change could also be felt in terms of "physical" risks,
both to the valuation of assets at risk from extreme climate outcomes, and in
terms of the potential longer-term impacts on mortality.
Over the next decade, the change necessary to meet global carbon reduction
targets will require societal adjustments on an unprecedented scale. A failure
by governments to ensure an orderly transition to low carbon economies
increases the risk for sudden late policy action and large, unanticipated
shifts in the asset values of impacted industries. Whilst our transition plans
seek to minimise our overall exposure to this risk, their execution is
dependent on the delivery of the policy actions and the climate reduction
targets of the firms we invest in. The actions governments take will also to
some extent inform how we can deliver upon the commitments we have made, and
as the science of climate change evolves, we may need to adapt our actions.
Anti ESG sentiment, particularly within countries with a high dependency on
fossil fuel related industries, may also constrain global ambition in
addressing climate change as well as limiting investment opportunities.
As recent events in the northern hemisphere summer have shown, the impacts of
increased climate volatility can be significant and will sometimes emerge
rapidly.
Reserves and our assessment of capital requirements may require revision as a We undertake significant analysis of the variables associated with writing
result of changes in experience, regulation or legislation. 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 for
factors including mortality, lapse rates, valuation interest rates, and
expenses, as well as credit default in the assets backing our insurance
The pricing of long-term business requires the setting of assumptions for liabilities. We also aim to pre-fund and warehouse appropriate investment
long-term trends in factors such as mortality, lapse rates, valuation interest assets to support the pricing of long-term business.
rates, expenses and credit defaults as well as the availability of assets with
appropriate returns. Actual experience may require recalibration of these
assumptions, increasing the level of reserves and impacting reported
profitability. Management estimates are also required in the derivation of We seek to have a comprehensive understanding of longevity, mortality and
Solvency II capital metrics. These include modelling simplifications to morbidity risks, and we continue to evaluate wider trends in life expectancy.
reflect that it is not possible to perfectly model the external environment. However, we cannot remove the risk that adjustment to reserves may be
Forced changes in reserves can also arise from regulatory or legislative required, although the selective use of reinsurance acts to reduce the impacts
intervention impacting capital requirements and profitability. to us of significant variations in life expectancy and mortality.
We are seeing elevated levels of mortality in both the UK and the US,
reflecting the ongoing direct and indirect impacts of Covid 19 related
illness, including the deferral of diagnostics and medical treatments for
other conditions, and there remains continued uncertainty to the impacts of
"long covid" .Cost of living pressures and government spending decisions also
have the potential to affect mortality outcomes.
Along with the emergence of new diseases and changes in immunology impacting
mortality and morbidity assumptions, other risk factors that may impact future
reserving requirements include a dramatic advance in medical science, beyond
that anticipated, requiring adjustment to our longevity assumptions. Whilst at
present we do not believe climate change to be material driver for mortality
and longevity risk in the medium term, we continue to keep this under review.
RISKS AND
UNCERTAINTIES
TREND, OUTLOOK AND MITIGATION
Changes in regulation or legislation may have a detrimental effect on our We are supportive of regulation in the markets in which we operate where it
strategy. ensures trust and confidence and can be a positive force on business.
Legislation and government fiscal policy influence our product design, the We seek to actively participate with government and regulatory bodies to
period of retention of products and required reserves for future liabilities. assist in the evaluation of change to develop outcomes that meet the needs of
Regulation defines the overall framework for the design, marketing, taxation all stakeholders. Internally, we evaluate change as part of our formal risk
and distribution of our products, and the prudential capital that we hold. assessment processes, with material matters being considered at the Group Risk
Significant changes in legislation or regulation may increase our cost base, Committee and the Group Board. Our internal control framework seeks to ensure
reduce our future revenues, and impact profitability or require us to hold on-going compliance with relevant legislation and regulation. Residual risk
more capital. remains, however, that controls may fail or that historic financial services
industry accepted practices may be reappraised by regulators, resulting in
sanctions against the group.
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 Regulatory driven change remains a significant risk factor across our
time, having a retrospective effect on in-force books of business, impacting businesses. Key areas of change include HM Treasury's consultation on Solvency
future cash generation. II, with reforms to areas such as the risk margin and the management of
matching adjustment portfolios, albeit the detailed outcome remains somewhat
uncertain, and regulatory frameworks for the governance of Pensions Dashboards
services. We are making good progress in meeting the requirements of the UK's
financial conduct regulator's new Consumer Duty.
There have been regulatory guidance papers published by the Bank of England
(via the Financial Policy Committee), the Financial Conduct Authority and The
Pensions Regulator all issuing recommendations designed to further improve LDI
resilience to future volatility. We have continued to identify and strengthen
the resiliency of our LDI strategies specifically and broader processes.
Regulatory focus also continues on the operational resilience of financial
services firms; the management of third parties; and approaches being taken in
response to the threats from climate change, including most recently proposed
sustainability labelling for investment funds.
We are also monitoring changes in UK fiscal policy and global minimum tax
environment; and within our property construction businesses, we are
implementing relevant requirements of the Building Safety Bill and the
Environment Act 2021.
New entrants and/or technology may disrupt the markets in which we operate. We continuously monitor the factors that may impact the markets in which we
operate, including evolving domestic and internal capital standards, and are
maintaining our focus on developing our digital platforms.
There is already strong competition in our markets, and although we have had
considerable past success at building scale to offer low cost products, we
recognise that markets remain attractive to new entrants. It is possible that We observe a continued acceleration of a number of trends, including greater
alternative digitally enabled financial services providers emerge with lower consumer engagement in digital business models and on-line servicing tools.
cost business models or innovative service propositions and disrupt the The post pandemic operating environment has also seen businesses like ours
current competitive landscape. We are also cognisant of competitors who may transform working practices, and we expect to continue to invest in
have lower return on capital requirements or be unconstrained by Solvency II. automation, using robotics and machine learning to improve business
efficiency. We are deepening our understanding of the impacts of AI on our
businesses and in the wider sector. Our businesses are also well positioned
for changes in the competitive landscape that may arise from the roll out of
The continued evolution of AI has the potential to be significant disrupting defined benefit 'superfund' consolidation schemes, pension dashboards and
force across our businesses, for example by enabling new entrants to compete 'collective' pension scheme arrangements.
with potentially lower costs, and more efficient processes. The technology
itself could have an impact on asset valuations, and on our liabilities
including through its impact on life sciences and health care systems
effectiveness.
RISKS AND
UNCERTAINTIES
TREND, OUTLOOK AND MITIGATION
A material failure in our business processes or IT security may result in Our risk governance model seeks to ensure that business management are
unanticipated financial loss or reputation damage. actively engaged in maintaining an appropriate control environment, supported
by risk functions led by the Group Chief Risk Officer, with independent
assurance from Group Internal Audit.
We have constructed our framework of internal controls to minimise the risk of Whilst we seek to maintain a control environment commensurate with our risk
unanticipated financial loss or damage to our reputation. However, no system profile, we recognise that residual risk will always remain across the
of internal control can completely eliminate the risk of error, financial spectrum of our business operations and we aim to develop response plans so
loss, fraudulent actions, or reputational damage. We are also inherently that when adverse events occur, appropriate actions are deployed.
exposed to cyber threats including the risks of data theft and fraud. There is
also strong stakeholder expectation that our core business services are
resilient to operational disruption.
We continue to remain alert to evolving operational risks and invest in our
system capabilities, including those for the management of cyber risks, to
ensure that our business processes are resilient. We also remain cognisant of
the risks as we implement a new global operating model and IT platform for
LGIM and have structured the migration in phases to minimise change risks.
The success of our operations is dependent on the ability to attract and We seek to ensure that key personnel dependencies do not arise, through
retain highly qualified professional people. employee training and development programmes, remuneration strategies and
succession planning. Our processes include the active identification and
development of talent within our workforce, and by highlighting our values and
social purpose, promoting Legal & General as a great place to work. As
The Group aims to on recruit, develop and retain high quality individuals. We well as investing in our people, we are also transforming how we engage and
are inherently exposed to the risk that key personnel or teams of expertise develop capabilities, with new technologies and tools to support
may leave the Group, with an adverse effect on the Group's businesses. As we globalisation, increase productivity and provide an exceptional employee
increasingly focus on the digitalisation of our businesses, we are also experience.
competing for data and digital skill sets with other business sectors as well
as our peers.
Competition for talent remains strong with skills in areas such as technology
and digital particularly sought after across many business sectors, including
those in which we operate. We also recognise the risks posed by the outlook
for inflation in salary expectations across the wider employment market, and
internally we have taken steps to help our employees through direct financial
support and by providing advice and resources to help them manage their
financial well-being.
Notes
A copy of this announcement can be found in "Results, Reports and
Presentations", under the "Investors" section of our shareholder website at
www.legalandgeneralgroup.com/investors/results-reports-and-presentations
(http://www.legalandgeneralgroup.com/investors/results-reports-and-presentations)
.
A presentation to analysts and investors will take place at 10:30am UK time
today at One Coleman Street, London, EC2R 5AA. There will also be a live
webcast of the presentation that can be accessed at
www.legalandgeneralgroup.com/investors/results-reports-and-presentations
(http://www.legalandgeneralgroup.com/investors/results-reports-and-presentations)
.
A replay of the presentation will be made available on this website by 18(th)
August 2023.
Financial Calendar Date
2023 interim results announcement 15 August 2023
Ex-dividend date (2023 interim dividend) 24 August 2023
Record date 25 August 2023
Dividend payment date 26 September 2023
2023 preliminary results announcement 6 March 2024
Definitions
Definitions are included in the Glossary on pages 105 to 110 of this
release.
Forward-looking statements
This announcement may contain 'forward-looking statements' with respect to the
financial condition, performance and position, strategy, results of operations
and businesses of the Company and the Group that are based on current
expectations or beliefs, as well as assumptions about future events. These
forward-looking statements can be identified by the fact that they do not
relate only to historical or current facts. Forward-looking statements often
use words such as 'may', 'could', 'will', 'expect', 'intend', 'estimate',
'anticipate', 'believe', 'plan', 'seek', 'continue' or other words of similar
meaning. By their very nature, forward-looking statements are subject to
known and unknown risks and uncertainties and can be affected by other factors
that could cause actual results, and the Group's plans and objectives, to
differ materially from those expressed or implied in the forward-looking
statements. Recipients should not place reliance on, and are cautioned about
relying on, any forward-looking statements.
There are several factors which could cause actual results to differ
materially from those expressed or implied in forward-looking statements.
The factors that could cause actual results to differ materially from those
described in the forward-looking statements include (but are not limited to):
changes in global, political, economic, business, competitive and market
forces or conditions; future exchange and interest rates; changes in
environmental, social or physical risks; legislative, regulatory and policy
developments; risks arising out of health crises and pandemics; changes in tax
rates, future business combinations or dispositions; and other factors
specific to the Group. Any forward-looking statement contained in this
document is based on past or current trends and/or activities of the Group and
should not be taken as a representation that such trends or activities will
continue in the future. No statement in this document is intended to be a
profit forecast or to imply that the earnings of the Group for the current
year or future years will necessarily match or exceed the historical or
published earnings of the Group. Each forward-looking statement speaks only
as of the date of the particular statement. Except as required by any
applicable laws or regulations, the Group expressly disclaims any obligation
to revise or update any forward-looking statement contained within this
document, regardless of whether those statements are affected as a result of
new information, future events or otherwise.
The information, statements and opinions contained in this announcement do not
constitute an offer to sell or buy or the solicitation of an offer to sell or
buy any securities or financial instruments nor do they constitute any advice
or recommendation with respect to such securities or other financial
instruments or any other matter
Caution about climate information
This announcement contains climate and ESG disclosures which use a large
number of judgments, assumptions and estimates. These judgments, assumptions
and estimates are likely to change over time. In addition, the Group's
climate risk analysis and net zero strategy remain under development and the
data underlying the analysis and strategy remain subject to evolution. As a
result, certain climate and ESG disclosures made in this announcement are
likely to be amended, updated, recalculated or restated in future
announcements. This statement should be read together with the cautionary
statement contained in the Group's 2022 Climate Report.
Going concern statement
Going concern statement is included on disclosure note 4.01(i) on page 46 of
this release.
Directors' responsibility statement
We confirm to the best of our knowledge that:
i. The consolidated interim financial statements have been prepared
in accordance with UK-adopted IAS 34 Interim Financial Reporting;
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
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 2022.
A list of current directors is maintained on the Legal & General Group Plc
website:
https://group.legalandgeneral.com/en/about-us/our-management/group-board
(https://group.legalandgeneral.com/en/about-us/our-management/group-board) .
By order of the Board
Sir Nigel Wilson
Stuart Jeffrey Davies
Group Chief Executive
Group Chief Financial Officer
14 August
2023
14 August 2023
Enquiries
Investors
+44 203 124 2091
Edward Houghton, Group Strategy & Investor Relations Director
investor.relations@group.landg.com
+44 203 124 2054
Gregory Franck, Investor Relations Director
investor.relations@group.landg.com
+1 240 397 0053
Blake Carr, Investor Relations Director
investor.relations@group.landg.com
Media
+44 738 443 5692
Natalie Whitty, Group Corporate Affairs Director
+44 772 041 4235
Graeme Wilson, Teneo
+44 776 773 5273
Misha Bayliss, Teneo
(1 ) The Group uses a number of Alternative Performance Measures (including
adjusted operating profit, return on equity and LGIM AUM) to enhance
understanding of the Group's performance. These are defined in the glossary,
on pages 102 to 110 of this report. This is the first time we are reporting
under IFRS 17. Comparatives have been restated accordingly. For further
information please see Note 2.01.
(2 ) Solvency II coverage ratio of 230% is post £0.8bn payment of 2022
final dividend.
(3 ) Profit after tax attributable to equity holders.
(4 ) Capital generation defined as Solvency II operational surplus
generation. Cash generation previously defined as net release from operations
is no longer reported under IFRS 17.
(5 ) Net surplus generation defined as Solvency II operational surplus
generation less new business strain.
(6 ) In stating this aim, the Board has carefully considered the Group's
financial position and had regard to the general economic outlook for the UK
and the other countries in which the Group operates.
(7 ) Stock of deferred profit refers to the gross of tax combination of
established Contractual Service Margin "CSM" (net of reinsurance) and Risk
Adjustment "RA" under IFRS 17
(8 ) Figures presented include an adjustment for the new business CSM/RA
uplift associated with the L&G pension schemes' partial buy-in transaction
in H1, which is eliminated in the 30 June 2023 consolidated balance sheet. In
H2 we expect to move to a full buy-out of the pension schemes and recognise a
further c£0.1bn of CSM/RA.
9 Solvency II margin on UK pension risk transfer volumes only.
10 (#_ednref2) Profit before tax attributable to equity holders is an
Alternative Performance Measure and represents Adjusted profit before tax
attributable to equity holders as defined on page 103.
11 (#_ednref3) Solvency II coverage ratio incorporates the impact of
recalculating the Transitional Measures for Technical Provisions (TMTP) as at
30 June 2023.
12 (#_ednref4) ifrs17-rns-july-2023-final.pdf (legalandgeneral.com)
(https://group.legalandgeneral.com/media/i0kdigk4/ifrs17-rns-july-2023-final.pdf)
13 (#_ednref5) Calculated using annualised profit for the year and average
equity attributable to the owners of the parent of £4,853m.
14 (#_ednref6) Calculated using the Group's effective tax rate.
15 (#_ednref7) Total stock of deferred profit represents the closing H1 2023
Contractual Service Margin "CSM" (net of reinsurance) and Risk Adjustments
"RA", gross of tax. Figures include the new business CSM/RA uplift associated
with the L&G pension schemes' partial buy-in transaction in H1. In H2 we
expect to move to a full buy-out of the pension schemes.
16 (#_ednref8) In the independent (brokerage) channel
17 (#_ednref9) Total annuity assets of £72.6bn, with an estimated split of
£55.5bn LGRI, £17.1bn Retail retirement.
18 (#_ednref10) IPE, Top 500 Asset Managers 2022.
19 (#_ednref11) International AUM includes assets from internationally
domiciled clients plus assets managed internationally on behalf of UK clients.
20 (#_ednref12) Three year average (H2 2020-H1 2023) measured by UK PRT new
business volumes. Three year average measured by UK PRT deal count from LGIM
clients is 63%.
21 (#_ednref13) Broadridge, UK Defined Contribution and Retirement Income
report 2021. 2021 UK DC Assets: £515bn.
22 (#_ednref14) For more information please refer to
https://group.legalandgeneral.com/en/sustainability
(https://group.legalandgeneral.com/en/sustainability)
23 (#_ednref15) Proprietary assets relate to Investments to which
shareholders are directly exposed (excluding client and policyholder assets,
derivatives, cash, cash equivalents and loans), as disclosed in Note 6.01.
24 (#_ednref16) Our 2022 Climate Report and our 2022 Social Impact Report
were released on 16(th) March 2023 and can be found here: Sustainability
reporting centre
(https://group.legalandgeneral.com/en/sustainability/sustainability-reporting-centre)
25 (#_ednref17) AUM in responsible investment strategies represents only the
AUM from funds or client mandates that feature a deliberate and positive
expression of ESG criteria in the fund documentation for pooled fund
structures or in a client's Investment Management Agreement. Mandates which
only invest in government bonds are not included, however where LGIM manages a
mandate (for a third-party client) which is invested in a broad asset exposure
that includes, but is not limited to, government bonds, these mandates would
be included subject to that mandate having a deliberate and positive
expression of ESG criteria.
26 (#_ednref18) Represents voting instructions for main FTSE pooled index
funds.
27 (#_ednref19) PRI assessment report:
2021-assessment-report-for-legal--general-investment-management-holdings.pdf
(lgim.com)
(https://www.lgim.com/landg-assets/lgim/capabilities/investment-stewardship/2021-assessment-report-for-legal--general-investment-management-holdings.pdf)
28 (#_ednref20) The ambitions are based on the aggregate performance over a
five-year period. Performance may vary from year to year and individual
statements may not be met in each year on a standalone basis.
29 (#_ednref21) Capital generation is Solvency II operational surplus
generation. Dividends on a declared basis and originally on the basis of a
flat final 2020 dividend, and 3-6% annual growth thereafter. Note: dividends
have grown at 5% since HY21 and the Board stated publicly in November 2022 its
aim to "continue to grow the dividend at 5% per annum to FY 2024":
ifrs17-rns-final.pdf (legalandgeneral.com)
(https://group.legalandgeneral.com/media/5l4bwpre/ifrs17-rns-final.pdf) .
Dividend decisions are subject to final Board approval. Note: we previously
also had an ambition to generate cumulatively £8.0bn - £9.0bn cash over the
period. However, under IFRS 17 we will no longer be producing 'Net release
from operations' on which our cash generation metric is based. We have
therefore chosen to retire the cash generation ambition from FY 2022.
30 (#_ednref22) EPS based on IFRS 17 from FY22.
31 (#_ednref23) LCP pensions de-risking report 2022, PPF 7800 Index at 30
June 2023 and L&G estimates.
32 (#_ednref24) LIMRA & ICI Q1 2023 retirement market data and L&G
estimates.
33 (#_ednref25) Statistics Canada, Mercer Pension Health Pulse 2022, WTW
Group Annuity Market Pulse - 2022 Annual Review and L&G estimates.
34 (#_ednref26) De Nederlandsche Bank (DNB), Q1 2023 and L&G estimates
35 (#_ednref27) Ranked number one in the independent channel in Q1 2023 by
APE and new policies issued.
36 (#_ednref28) Broadridge, UK Defined Contribution and Retirement Income
report 2022.
37 (#_ednref29) ABI Q1 2023 Report. External annuities include all incoming
external transfers from either Personal Pension Arrangements or Occupational
Pension Schemes
38 (#_ednref30) For further information see link here: Lifetime Mortgages |
Legal & General (legalandgeneral.com)
(https://www.legalandgeneral.com/adviser/retirement/later-life-mortgages/getting-started-with-lifetime-mortgages/infographic/)
.
39 (#_ednref31) Pridham Q1 2018 - Q2 2023
40 (#_ednref32) ABI Q1 2023 Report.
41 (#_ednref33) Excludes costs relating to the announced Modular Homes
closure.
42 (#_ednref34) Persistency is a measure of LGIM client asset retention,
calculated as a function of net flows and closing AUM.
43 (#_ednref35) Ranked seventh by AUM, Japanese industry publication
(Pension News) March 2022.
44 (#_ednref36) Pridham Q1 & Q2 2023 report
45 (#_ednref37) Figures reflect total managed assets including AUM from fund
of fund structures. As at 30 June 2023 of the total Real Assets AUM
(£36.7bn), £35.6bn was invested directly by clients in Real Assets
capabilities
46 (#_ednref38) SIAF = Secure Income Assets Fund. STAFF = Short Term
Alternative Finance Fund.
47 (#_ednref39) Net fund performance data versus key comparators (benchmark
or generic peer groups as per the relevant prospectuses, and benchmark per the
relevant prospectus or custom peer group for Active Strategies - Bonds)
sourced from Lipper for the LGIM UCITS. All data as at 30 June 2023.
48 (#_ednref40) Multi Asset - Net fund performance data versus key
comparators (benchmark or generic (IA) peer groups as per the relevant
prospectuses or internal custom peer groups) sourced from Lipper/Bloomberg for
the LGIM UCITS and Gross fund versus key comparators (benchmark or generic
(ABI) peer groups) for PMC Pooled "Standard" Funds. All data as at 30 June
2023
49 (#_ednref41) Based on Q1 2023 position.
50 (#_ednref42) AUM in responsible investment strategies represents only the
AUM from funds or client mandates that feature a deliberate and positive
expression of ESG criteria, in the fund documentation for pooled fund
structures or in a client's Investment Management Agreement. Mandates which
only invest in government bonds are not included, however where LGIM manages a
mandate (for a third-party client) which is invested in a broad asset exposure
that includes, but is not limited to, government bonds, these mandates would
be included subject to that mandate having a deliberate and positive
expression of ESG criteria.
51 (#_ednref43) https://www.lgim.com/uk/en/responsible-investing/
(https://www.lgim.com/uk/en/responsible-investing/)
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 (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END IR NKQBQCBKDFFDRecent news on Legal & General
See all newsREG - Legal & General Grp - Director/PDMR Shareholding
AnnouncementREG - Legal & General Grp - Director/PDMR Shareholding
AnnouncementREG - Legal & General Grp - Total Voting Rights
AnnouncementREG - Legal&Gen Inv Mgmnt Barratt Devlpmnts. - Form 8.3 - Barratt Developments plc
AnnouncementREG - Legal&Gen Inv Mgmnt Barratt Devlpmnts. - Form 8.3 - Barratt Developments plc
Announcement