TIDMLGEN
RNS Number : 2890J
Legal & General Group Plc
15 August 2023
H1 2023 Results: GBP0.95bn of operating profit and capital
generation, stock of deferred profits up to GBP13.8bn, DPS up 5% to
5.71p and SII ratio of 230%
Resilient financial performance(1)
-- Operating profit of GBP941m (H1 2022: GBP958m)
-- Solvency II coverage ratio(2) of 230%, with surplus of GBP9.2bn (H1 2022: 212%)
-- Solvency II operational surplus generation of GBP947m (H1 2022: GBP946m)
-- Profit after tax(3) of GBP316m (H1 2022: GBP575m)
-- Interim dividend of 5.71p, up 5% (H1 2022: 5.44p)
GBP947m capital generation with significant dividend headroom
(4)
-- We are on track to achieve our five-year (2020-2024) ambitions. To date:
-- Capital generation of GBP5.9bn (GBP8.0-9.0bn by 2024)
-- Dividends of GBP3.6bn (GBP5.6-5.9bn by 2024)
-- Net surplus generation over dividends of GBP0.6bn(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 GBP13.8bn as new business
outpaces backbook release (7)
-- New business deferred profits of GBP0.6bn
-- LGRI premiums of GBP5.0bn (H1 2022: GBP4.4bn) generating deferred profit of GBP0.4bn(8)
-- In H2, LGRI has already written a further GBP1.8bn 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 GBP0.95bn of both IFRS operating profit and capital
generation, together with a Solvency II ratio of 230% and a surplus
of GBP9.2bn. 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 GBP4.9bn of
UK PRT, deploying just GBP106m 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
GBPm 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) i ncludes 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 GBP55-60m.
H1 2023 Financial performance
Income statement
Year to date operating performance is resilient with H1 2023
operating profit from divisions of GBP1,139m (H1 2022: GBP1,153m).
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 GBP471m (H1 2022:
GBP395m) 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 GBP4,992m of global
PRT (H1 2022: GBP4,449m) at a Solvency II new business margin
(8.0%) [9] in line with our long-term average. H2 has started well,
with GBP1.8bn of UK PRT and $1.0bn of US PRT completed to date.
Retail delivered operating profit of GBP230m (H1 2022: GBP295m).
Whilst insurance operating profit is up 4% (H1 2023: GBP243m, H1
2022: GBP234m), 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 GBP296m (H1 2022:
GBP263m) driven by our alternative asset portfolio, where operating
profit increased to GBP230m (H1 2022: GBP202m). 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 GBP142m (H1 2022: GBP200m)
primarily reflecting the impact of rising interest rates on assets
under management, which decreased by GBP132bn to GBP1,158bn (H1
2022: GBP1,290bn). 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] was
GBP324m (H1 2022: GBP697m), reflecting investment variance of
GBP(617)m (H1 2022: GBP(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 GBP947m (H1 2022: GBP946m) despite rising interest rates
which reduced SCR releases. Net surplus generation (NSG) was
GBP752m (H1 2022: GBP825m). 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 GBP55-60m for PRT and Individual annuities
combined. We have scope to write up to GBP11bn 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] of 230% at
H1 2023 (FY 2022: 236%, H1 2022: 212%), slightly ahead of our
recent disclosure [12] (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] 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]
Our stock of deferred profit increased 3% to GBP13.8bn (H1 2022:
GBP13.4bn), with CSM up 7% to GBP12.4bn, reflecting contributions
from our growing annuity businesses and routine longevity updates
in H2 2022, partially offset by the Risk Adjustment (GBP1.5bn)
reducing from H1 2022 (GBP1.9bn) as a result of rising interest
rates. [15]
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 A leading international manager of institutional Pension
Solutions Risk Transfer (PRT) business
----------------- ---------------------------------------------------------
Retail Retirement A leading provider of UK retail retirement and protection
& Protection solutions and US term life insurance [16]
Solutions
----------------- ---------------------------------------------------------
LGC Asset Origination An alternative asset origination platform generating
attractive shareholder returns
----------------- ---------------------------------------------------------
LGIM Asset Management A global GBP1.2tn 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 GBP55.5bn. [17] 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] with GBP1.2tn of AUM of which GBP457bn, or 39%, are
international assets [19] . 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] LGIM is also the market leader in UK Defined
Contribution ( DC) pension scheme clients with DC AUM of GBP146bn -
a market with significant growth potential, with total UK DC assets
expected to surpass GBP1.2tn by 2031. [21]
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] We
think about sustainability in terms of:
1. How we invest proprietary assets . [23] 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 GBP1.4bn in clean energy and GBP8.7bn 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]
2. How we influence as one of the world's largest asset managers
with GBP 1.2 trillion AUM . We have GBP331.6bn 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](, [26]) 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] 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] are for :
-- Capital generation (of GBP8.0bn - GBP9.0bn) significantly to
exceed dividends (of GBP5.6bn - GBP5.9bn) [29]
-- Earnings per share to grow faster than dividends, with the
dividend growing at 5% per annum to FY 2024 [30]
-- 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 GBP947m
in capital generation (H1 2022: GBP946m), and from the start of the
ambition period to H1 2023, we have now achieved GBP5.9bn of
cumulative capital generation while declaring dividends of
GBP3.6bn.
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 GBP9.2bn over a capital
requirement of GBP7.0bn.
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 GBP6 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 GBP1.4 trillion of UK DB pension liabilities, of
which an estimated c15% has been transferred to insurance companies
to date. [31] 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 GBP8-10bn 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 GBP0.6bn. For 2023 as a whole, we currently have capacity
to write up to GBP11bn 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] 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] 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 EUR 1 trillion [34] , 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] 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 cGBP600bn in UK Defined Contribution (DC)
accumulation assets (of which LGIM manage GBP146bn including those
administrated by Workplace Savings), and this is expected to more
than double over the next ten years. [36] 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 cGBP45.6bn 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] 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 GBP4.4 trillion. [38] 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 cGBP5bn by 2025 (H1 2023: GBP4.2bn),
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 GBP600-700m in 2025. Additionally,
we plan to increase third party capital to GBP25-30bn (H1 2023:
GBP16.8bn) .
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]
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 a round 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 (GBP457bn) - 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) GBPm 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) (GBPbn) 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 GBP471m
LGRI continues to deliver strong operating profit of GBP471m, up
19% (H1 2022: GBP395m).
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
GBP266m (H1 2022: GBP239m). 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
(GBP8.1bn) has released into profit.
Risk Adjustment (RA) release of GBP54m (H1 2022: GBP68m). 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 GBP213m (H1 2022:
GBP139m). 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 GBP66m (H1 2022: GBP(65)m).
Reflects no n-attributable expenses i.e overheads, as the insurance
liabilities reflect only expenses deemed directly attributable to
the insurance contract.
Profit before tax was GBP285m (H1 2022: GBP412m) 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
GBP0.4bn of deferred profit to the CSM and RA
During H1 2023, we wrote GBP5.0bn of global pension risk
transfer (PRT) new business across 20 deals (H1 2022: GBP4.4bn, 25
deals). UK volumes increased 31% to GBP4.9bn (H1 2022: GBP3.7bn)
and international volumes were GBP0.1bn (H1 2022: GBP0.7bn).
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 GBP0.4bn
of deferred profit to the CSM and RA (8) , contributing to the
growth of the CSM over H1 2023.
The GBP4.9bn 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 GBP1bn+ 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:
-- cGBP2.7bn follow-on transaction with the British Steel
Pension Scheme, executed under an umbrella agreement. Legal &
General has now insured GBP7.5bn 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.
-- cGBP1.0bn 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:
GBP126m , H1 2022: $729m; GBP593m) 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) GBPm 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) (GBPbn) 3.0 4.3
Lifetime & Retirement Interest Only mortgage
advances 163 338
Retail retirement annuity assets(5) (GBPbn) 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 GBP230m
During the first half of 2023, Retail operating profit was
GBP230m (H1 2022: GBP295m). Whilst insurance operating profit is up
4% (H1 2023: GBP243m, H1 2022: GBP234m) 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 GBP210m
(H1 2022: GBP206m). The CSM release reflects the release of
previously unearned insurance profits as the insurance service is
provided over time. I n H1 2023 4.6% of the closing CSM pre-release
(GBP4.7bn) has released into profit.
Risk Adjustment (RA) release of GBP49m (H1 2022: GBP44m). 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 GBP49m (H1 2022:
GBP38m). 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 GBP(26)m (H1 2022: GBP(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 GBP8m
of onerous contract unwind on legacy policies.
Non-attributable expenses of GBP(39)m (H1 2022: GBP(43)m).
Reflects no n-attributable expenses i.e overheads, as the insurance
liabilities reflect only expenses deemed directly attributable to
the insurance contract.
Profit before tax was GBP144m (H1 2022: GBP352m) 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 GBP5m to GBP119m (H1
2022: GBP124m) 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 GBP752m
(H1 2022: GBP740m), with new business annual premiums of GBP76m (H1
2022: GBP85m) in what is an increasingly competitive market.
L&G continues to lead this market with a share of 19.4% [40] ,
delivering a point-of-sale decision for more than 80% of our
customers.
UK Group protection gross premium income increasing 1% to
GBP295m (H1 2022: GBP291m) thanks to strong retention and new
business annual premiums of GBP53m (H1 2022: GBP63m). 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 GBP48bn of
mortgages, (H1 2022: GBP50bn) 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 GBP575m (H1 2022: GBP453m). 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 GBP163m (H1 2022: GBP338m) 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 GBP3.0bn (H1 2022: GBP4.3bn),
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 GBPm 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 GBPm
==================================================== ======= ========
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 GBPm
==================================================== ======= ========
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 GBP296m
LGC operating profit increased 13% to GBP296m [41] (H1 2022:
GBP263m) reflecting a strong contribution from our alternative
asset portfolio of GBP230m (H1 2022: GBP202m).
Profit before tax(2) was GBP104m, with investment and other
variances of GBP(192)m, which is most notably driven by the impact
of higher interest rates on the LGC portfolio.
Alternative asset portfolio grew 13% to GBP4.2bn
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 GBP4,220m (H1 2022: GBP3,739m) as we deployed a
further GBP0.3bn 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
GBP4bn 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 GBP1.7bn 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 GBP70 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 EUR390 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 GBP2,246m (H1 2022: GBP2,190m) 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 GBP619m (H1 2022: GBP619m) and profit before tax of GBP73m (H1
2022: GBP98m) 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 GBP1.2bn. 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 EUR17.5bn (H1 2022: EUR14.9bn) from 187 investors
globally across seven strategies since we first invested in 2014.
In H1 2023 it delivered EUR52m in revenue (H1 2022: EUR45m). 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 GBPm 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 GBPbn
================================================== ======== ========
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] (%) 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 GBP142m, reflecting higher interest
rates
Operating profit of GBP142m (H1 2022: GBP200m) reflects the
impact of higher interest rates on assets under management, and
therefore revenues, and is in line with H2 2022 (GBP140m). 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 GBP1,158.1bn
(H1 2022: GBP1,289.7bn), reflecting the impact of market conditions
and external net outflows over H1 2023 of GBP(12.3)bn (H1 2022:
inflows of GBP65.6bn). This includes GBP19.7bn 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 GBP7.4bn with a continued
focus on higher-margin capabilities, generating GBP8.4m 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 GBP431m (H1 2022:
GBP485m). Transactional revenue was robust at GBP9m (H1 2022:
GBP9m) 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 GBP298m in H1 2023 were flat on an
FX-adjusted basis compared to H1 2022 (GBP294m).
Expanding our global footprint with International AUM of
GBP457bn
We are successfully building internationally, with international
AUM having grown by 78% since 2018 to GBP457bn, 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 GBP68.7bn.
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] 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
GBP7.5bn of pension liabilities with LGRI via a GBP2.7bn 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 GBP5.5bn, supported by the
ongoing growth in Retail's Workplace pension business, which now
has 5.0 million members. Annualised net new revenue was GBP6.5m and
total UK DC AUM is GBP146bn (H1 2022: GBP130bn). 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 GBP22.1bn of AUM, making it the first
commercial Master Trust to surpass GBP20bn 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] Our Strategic Bond Fund attracted
strong inflows in the period totalling GBP200m demonstrating our
strong Fixed Income credentials. Higher margin Multi-Asset funds
now have over GBP10.5bn 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 GBP1.5bn (H1 2022: GBP0.7bn)
driven by GBP2.1bn of Private Credit transactions of which the
majority support LGRI's PRT proposition. Private Credit AUM reached
GBP17.0bn [45] 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] , 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 GBP19.7bn (34) . In H1 2023 we raised EUR390m 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 GBP1.3bn
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]) 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] Within Private Markets, 86% [49]
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 GBP331.6bn (H1 2022: GBP271.2bn) in
responsible investment strategies explicitly linked to ESG criteria
for a broad range of clients. [50]
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]) 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 GBP4.3bn at 30
June 2023 (FY 2022: GBP4.3bn; H1 2022: GBP4.4bn). There is also a
further GBP1.3bn (FY 2022: GBP1.2bn; H1 2022: GBP1.2bn) of
operational borrowings including GBP1.1bn (FY 2022: GBP1.0bn; H1
2022: GBP1.0bn) of non-recourse borrowings.
Group debt costs of GBP106m (H1 2022: GBP108m) 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 GBP4.5bn (H1 2022:
GBP4.5bn).
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 GBP9.2bn over its Solvency Capital Requirement,
corresponding to a Solvency II coverage ratio of 230%.
Capital (GBPm) H1 2023 2022
=================================== ======= ========
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
=================================== ======= ========
Analysis of movement from 1 January Solvency Solvency Solvency
2023 to 30 June 2023(1) (GBPm) II Own Funds II SCR II Surplus
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 GBP947m (H1 2022:
GBP946m) , after allowing for amortisation of the opening
Transitional Measures on Technical Provisions (TMTP) and release of
Risk Margin.
New business strain was GBP(195)m, primarily reflecting PRT
volumes written at a capital strain of just over 2%. This resulted
in net surplus generation of GBP752m (H1 2022: GBP825m).
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 GBP18m 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 Impact on
net of tax net of tax
Solvency II Solvency
capital surplus II coverage
H1 2023 ratio
GBPbn H1 2023
%
======================================================== ================ =============
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 addition to ratings (0.2) (7)
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) :
GBPm PVNBP Contribution Margin
from %
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 TR, OUTLOOK AND MITIGATION
Investment market performance and conditions in the We cannot eliminate the downside impacts on our earnings,
broader economy may adversely impact profitability or surplus capital
earnings, profitability, or surplus capital. from investment market volatility and adverse economic
conditions, although we seek to position
The performance and liquidity of financial and property our investment portfolios and wider business plans for a
markets, interest rate movements and range of plausible economic scenarios
inflation impact the value of investments we hold in and investment market conditions to ensure their
shareholders' funds and to meet the obligations resilience across a range of outcomes. This
from insurance business; the movement in certain includes setting risk limits on exposures to different
investments directly impacts profitability. asset classes and where hedging instruments
Interest rate movements and inflation can also change the exist, we seek to remove interest rate and inflation risk
value of our obligations and although on a financial reporting basis.
we seek to match assets and liabilities, losses can still
arise from adverse markets. Falls Our ORSA is integral to our risk management approach,
in the risk-free yield curve can also create a greater supporting assessment of the financial
degree of inherent volatility to be impacts of risks associated with investment market
managed in the Solvency II balance sheet, potentially volatility and adverse economic scenarios
impacting capital requirements and surplus for our Solvency II balance sheet, capital sufficiency,
capital. Falls in investment values can reduce our and liquidity requirements.
investment management fee income.
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 We manage our exposure to downgrade and default risks
counterparty, the group is exposed to within our bond portfolios, through
the risk of financial loss. setting selection criteria and exposure limits, and using
LGIM's global credit team's capabilities
Systemic corporate sector failures, or a major sovereign to ensure risks are effectively controlled, where
debt event, could, in extreme scenarios, appropriate trading out to improve credit
trigger defaults impacting the value of our bond quality. In our property lending businesses, our loan
portfolios. Under Solvency II, a widespread criteria take account of borrower default
widening of credit spreads and downgrades can also and movements in the value of security. We manage our
result in a reduction in our Solvency II reinsurer exposures with the vast majority
balance sheet surplus, despite already setting aside of our reinsurers having a minimum A- rating, setting
significant capital for credit risk. rating-based exposure limits, and where
We are also exposed to default risks in dealing with appropriate taking collateral. Similarly, we seek to
banking, money market and reinsurance limit aggregate exposure to banking,
counterparties, as well as settlement, custody, and money market and service providers. Whilst we manage
other bespoke business services. Default risks to our balance sheet, we can never
risk also arises where we undertake property lending, eliminate downgrade or default risks, although we seek to
with exposure to loss if an accrued hold a strong balance sheet that
debt exceeds the value of security taken. we believe to be prudent for a range of adverse
scenarios.
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 TR, OUTLOOK AND MITIGATION
We fail to respond to the emerging threats from climate We recognise that our scale brings a responsibility to
change for our investment portfolios act decisively in positioning our balance
and wider businesses. sheet to the threats from climate change. We continue to
embed the assessment of climate risks
As a significant investor in financial markets, in our investment process, including in the management of
commercial real estate and housing, we are real assets. We measure the carbon
exposed to climate related transition risks, intensity targets of our investment portfolios, and along
particularly should abrupt shifts in the political with specific investment exclusions
and technological landscape impact the value of those for carbon intensive sectors, we have set overall
investment assets associated with higher reduction targets aligned with a 1.5degC
levels of greenhouse gas emissions. Our interests in interpretation of the Paris Agreement, including setting
property assets may also expose us to near term science-based targets and
physical climate change related risks, including flood a transition plan to support our long-term emission
risks. We are also exposed to reputation reduction goals. Alongside managing exposures,
and climate related litigation risks should our we closely monitor the political and regulatory
responses to the threats from climate change landscape, and as part of our climate strategy
be judged not to align with the expectations of we engage with regulators and investee companies in
environment, social and governance (ESG) groups. support of climate action. As we change
Our risk management approach is also reliant upon the how we invest, the products and services we offer, and
availability of verifiable consistent how we operate, we are also mindful
and comparable emissions data. of the need to ensure that we have the right skills for
the future.
The impacts of climate change could also be felt in
terms of "physical" risks, both to the We are increasingly building in the potential physical
valuation of assets at risk from extreme climate impacts of climate change on both assets
outcomes, and in terms of the potential longer-term and liabilities into our modelling and projections work.
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 We undertake significant analysis of the variables
require revision as a result of changes associated with writing long-term insurance
in experience, regulation or legislation. business to ensure that a suitable premium is charged for
the risks we take on, and that reserves
The pricing of long-term business requires the setting continue to remain appropriate for factors including
of assumptions for long-term trends mortality, lapse rates, valuation interest
in factors such as mortality, lapse rates, valuation rates, and expenses, as well as credit default in the
interest rates, expenses and credit defaults assets backing our insurance liabilities.
as well as the availability of assets with appropriate We also aim to pre-fund and warehouse appropriate
returns. Actual experience may require investment assets to support the pricing
recalibration of these assumptions, increasing the level of long-term business.
of reserves and impacting reported
profitability. Management estimates are also required in We seek to have a comprehensive understanding of
the derivation of Solvency II capital longevity, mortality and morbidity risks,
metrics. These include modelling simplifications to and we continue to evaluate wider trends in life
reflect that it is not possible to perfectly expectancy. However, we cannot remove the
model the external environment. Forced changes in risk that adjustment to reserves may be required,
reserves can also arise from regulatory although the selective use of reinsurance
or legislative intervention impacting capital acts to reduce the impacts to us of significant
requirements and profitability. 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 TR, OUTLOOK AND MITIGATION
Changes in regulation or legislation may have a We are supportive of regulation in the markets in which
detrimental effect on our strategy. we operate where it ensures trust
and confidence and can be a positive force on business.
Legislation and government fiscal policy influence our
product design, the period of retention We seek to actively participate with government and
of products and required reserves for future regulatory bodies to assist in the evaluation
liabilities. Regulation defines the overall framework of change to develop outcomes that meet the needs of all
for the design, marketing, taxation and distribution of stakeholders. Internally, we evaluate
our products, and the prudential capital change as part of our formal risk assessment processes,
that we hold. Significant changes in legislation or with material matters being considered
regulation may increase our cost base, at the Group Risk Committee and the Group Board. Our
reduce our future revenues, and impact profitability or internal control framework seeks to ensure
require us to hold more capital. on-going compliance with relevant legislation and
regulation. Residual risk remains, however,
The prominence of the risk increases where change is that controls may fail or that historic financial
implemented without prior engagement services industry accepted practices may
with the sector. The nature of long-term business can be reappraised by regulators, resulting in sanctions
also result in some changes in regulation, against the group.
and the re-interpretation of regulation over time,
having a retrospective effect on in-force Regulatory driven change remains a significant risk
books of business, impacting future cash generation. factor across our businesses. Key areas
of change include HM Treasury's consultation on Solvency
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 We continuously monitor the factors that may impact the
in which we operate. markets in which we operate, including
evolving domestic and internal capital standards, and are
There is already strong competition in our markets, and maintaining our focus on developing
although we have had considerable our digital platforms.
past success at building scale to offer low cost
products, we recognise that markets remain We observe a continued acceleration of a number of
attractive to new entrants. It is possible that trends, including greater consumer engagement
alternative digitally enabled financial services in digital business models and on-line servicing tools.
providers emerge with lower cost business models or The post pandemic operating environment
innovative service propositions and disrupt has also seen businesses like ours transform working
the current competitive landscape. We are also cognisant practices, and we expect to continue
of competitors who may have lower to invest in automation, using robotics and machine
return on capital requirements or be unconstrained by learning to improve business efficiency.
Solvency II. We are deepening our understanding of the impacts of AI
on our businesses and in the wider
The continued evolution of AI has the potential to be sector. Our businesses are also well positioned for
significant disrupting force across changes in the competitive landscape that
our businesses, for example by enabling new entrants to may arise from the roll out of defined benefit
compete with potentially lower costs, 'superfund' consolidation schemes, pension
and more efficient processes. The technology itself dashboards and 'collective' pension scheme arrangements.
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 TR, OUTLOOK AND MITIGATION
A material failure in our business processes or IT Our risk governance model seeks to ensure that business
security may result in unanticipated financial management are actively engaged in
loss or reputation damage. maintaining an appropriate control environment, supported
by risk functions led by the Group
We have constructed our framework of internal controls Chief Risk Officer, with independent assurance from Group
to minimise the risk of unanticipated Internal Audit.
financial loss or damage to our reputation. However, no Whilst we seek to maintain a control environment
system of internal control can completely commensurate with our risk profile, we recognise
eliminate the risk of error, financial loss, fraudulent that residual risk will always remain across the spectrum
actions, or reputational damage. We of our business operations and we
are also inherently exposed to cyber threats including aim to develop response plans so that when adverse events
the risks of data theft and fraud. occur, appropriate actions are deployed.
There is also strong stakeholder expectation that our
core business services are resilient We continue to remain alert to evolving operational risks
to operational disruption. 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 We seek to ensure that key personnel dependencies do not
ability to attract and retain highly qualified arise, through employee training
professional people. and development programmes, remuneration strategies and
succession planning. Our processes
The Group aims to on recruit, develop and retain high include the active identification and development of
quality individuals. We are inherently talent within our workforce, and by highlighting
exposed to the risk that key personnel or teams of our values and social purpose, promoting Legal & General
expertise may leave the Group, with an as a great place to work. As well
adverse effect on the Group's businesses. As we as investing in our people, we are also transforming how
increasingly focus on the digitalisation of we engage and develop capabilities,
our businesses, we are also competing for data and with new technologies and tools to support
digital skill sets with other business globalisation, increase productivity and provide
sectors as well as our peers. an exceptional employee experience.
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 we bsite at
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
.
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
T his 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
.
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 GBP0.8bn 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 cGBP0.1bn of
CSM/RA.
[9] Solvency II margin on UK pension risk transfer volumes only.
[10] 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] Solvency II coverage ratio incorporates the impact of
recalculating the Transitional Measures for Technical Provisions
(TMTP) as at 30 June 2023.
[12] ifrs17-rns-july-2023-final.pdf (legalandgeneral.com)
[13] Calculated using annualised profit for the year and average
equity attributable to the owners of the parent of GBP4,853m.
[14] Calculated using the Group's effective tax rate.
[15] 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] In the independent (brokerage) channel
[17] Total annuity assets of GBP72.6bn, with an estimated split
of GBP55.5bn LGRI, GBP17.1bn Retail retirement.
[18] IPE, Top 500 Asset Managers 2022.
[19] International AUM includes assets from internationally
domiciled clients plus assets managed internationally on behalf of
UK clients.
[20] 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] Broadridge, UK Defined Contribution and Retirement Income
report 2021. 2021 UK DC Assets: GBP515bn.
[22] For more information please refer to
https://group.legalandgeneral.com/en/sustainability
[23] 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] 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
[25] 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] Represents voting instructions for main FTSE pooled index
funds.
[27] PRI assessment report:
2021-assessment-report-for-legal--general-investment-management-holdings.pdf
(lgim.com)
[28] 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] 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) . Dividend decisions are subject to final
Board approval. Note: we previously also had an ambition to
generate cumulatively GBP8.0bn - GBP9.0bn 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] EPS based on IFRS 17 from FY22.
[31] LCP pensions de-risking report 2022, PPF 7800 Index at 30
June 2023 and L&G estimates.
[32] LIMRA & ICI Q1 2023 retirement market data and L&G
estimates.
[33] Statistics Canada, Mercer Pension Health Pulse 2022, WTW
Group Annuity Market Pulse - 2022 Annual Review and L&G
estimates.
[34] De Nederlandsche Bank (DNB), Q1 2023 and L&G
estimates
[35] R anked number one in the independent channel in Q1 2023 by
APE and new policies issued.
[36] Broadridge, UK Defined Contribution and Retirement Income
report 2022.
[37] ABI Q1 2023 Report. External annuities include all incoming
external transfers from either Personal Pension Arrangements or
Occupational Pension Schemes
[38] For further information see link here: Lifetime Mortgages |
Legal & General (legalandgeneral.com) .
[39] Pridham Q1 2018 - Q2 2023
[40] ABI Q1 2023 Report.
[41] Excludes costs relating to the announced Modular Homes
closure.
[42] Persistency is a measure of LGIM client asset retention,
calculated as a function of net flows and closing AUM.
[43] Ranked seventh by AUM, Japanese industry publication
(Pension News) March 2022.
[44] Pridham Q1 & Q2 2023 report
[45] Figures reflect total managed assets including AUM from
fund of fund structures. As at 30 June 2023 of the total Real
Assets AUM (GBP36.7bn), GBP35.6bn was invested directly by clients
in Real Assets capabilities
[46] SIAF = Secure Income Assets Fund. STAFF = Short Term
Alternative Finance Fund.
[47] 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] 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] Based on Q1 2023 position.
[50] 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] https://www.lgim.com/uk/en/responsible-investing/
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