# Legal & General Group Plc Operating profit up 11% to £1 billion & LGIM net flows of £60 billion

- Link: https://www.directorstalkinterviews.com/legal-general-group-plc-operating-profit-up-11-to-1-billion-lgim-net-flows-of-60-billion/412789673
- Published: 2019-08-07T07:40:14+01:00
- Author: Amilia Stone

**Legal & General Group Plc** (LGEN) today announced their Half Year results for
2019. 

**Financial highlights**^(**1**)

·    Operating profit of £1,005m, up 11% (H1 2018: £909m)

·    Earnings per share of 14.74p, up 13% (H1 2018: 13.00p)

·    Return on equity at 20.2% (H1 2018: 20.3%)

·    Interim dividend^(2) of 4.93p per share (H1 2018: 4.60p)

·    Profit after tax^(3) up 13% to £874m (H1 2018: £771m)

·    Net release from continuing operations up 29% to £858m (H1 2018: £663m)

·    Solvency II operational surplus generation up by 17% to £0.8bn (H1 2018: £0.7bn)

·    Solvency II coverage ratio^(4) of 171% (FY 2018: 188%), impacted by discounting
the balance sheet at lower interest rates

**Business highlights**

·       Pension Risk Transfer sales of £6,677m (H1 2018: £735m), including the UK’s
largest bulk annuity with Rolls Royce

·    Individual annuity sales up 47% to £497m (H1 2018: £337m)

·    Direct Investment up 36% at £22.2bn (H1 2018: £16.3bn)

·    LGIM AUM up 15% at £1,135bn (H1 2018: £985bn)

·    LGIM external net flows of £60.3bn (H1 2018: £14.6bn), with significant index
flows from Asian clients

·    Insurance GWP up 7% to £1,409m (H1 2018: £1,317m)

> “Legal & General’s five businesses collectively delivered another strong set of
> results in H1 2019, with EPS rising 13% to 14.74p, operating profit up 11% to 
> £1bn and a RoE of 20%.
> We have a depth of management, track record and opportunities that mean all five
> of our businesses should contribute to future growth. The opportunity in global
> Pension Risk Transfer, retail retirement solutions, and DC is immense and expected
> to continue. The sale of Mature Savings and General Insurance enables us to focus
> on businesses where we have leading market share and adjacent businesses where
> we see outstanding growth potential.
> Our balance sheet remains strong. We have a globally diversified asset portfolio
> with minimal exposure to UK sub-investment grade credit and a £3.2bn credit default
> reserve. H2 has started well, building on the success of our H1 transactions including
> the c.£4.6bn Rolls Royce PRT, £4bn Oxford University Future Cities deal and c.
> $50bn Japanese global index win.
> We are well-prepared for the full range of foreseeable Brexit outcomes and we 
> remain confident in our ability to deliver Inclusive Capitalism, growing value
> for shareholders, customers and the broader economy                           
> Nigel Wilson, Group Chief Executive

 _1. The Alternative Performance Measures within the Group’s financial highlights
are defined in the glossary, on page 95 of this report._

_2. A formulaic approach is used to set the interim dividend, being 30% of the prior
year full year dividend._

_3. Profit after tax attributable to equity holders._

_4. Solvency II coverage ratio on a shareholder basis is adjusted for the Own Funds
and SCR of the With-profits fund and the Group final salary pension schemes._

**Strategy overview                                                       **

The Group’s strategy continues to align to our six established long term growth 
drivers: ageing demographics; globalisation of asset markets; creating new real 
productive assets; reform of the welfare state; technological innovation; and providing“
today’s capital”. These drivers have led us to participate in material, high growth
markets where we are leaders or where we can leverage our expertise to increase 
our market share.

To deliver our strategy, Legal & General’s operating model comprises five businesses:

1.     Legal & General Retirement Institutional (LGRI)

2.     Legal & General Retirement Retail (LGRR)

3.     Legal & General Investment Management (LGIM)

4.     Legal & General Capital (LGC)

5.     Legal & General Insurance (LGI)

Our strategy has positioned us to be a leader in the pension asset management and
insurance markets, benefitting from a mutually reinforcing business model and unique
synergies in pension de-risking and asset manufacturing and management:

·      LGIM is the UK market leader in providing investment management to defined
benefit (DB) pension scheme clients, specifically through index, fixed income and
LDI strategies. This provides LGRI with a strong pipeline: on average around a third
of our annual pension risk transfer (PRT) premiums are from existing LGIM clients.

·      LGRI, the market leader in UK PRT, and LGRR, a leading provider of UK individual
annuities, has £72.1bn of assets predominantly managed by LGIM. This portfolio is
continually being enhanced with attractive, matching adjustment compliant direct
investments originated by LGC. 

·      LGC uses the Group’s shareholder capital to provide the equity investment
in, and to therefore manufacture, part of the direct investment portfolio used to
back LGRI and LGRR’s annuity liabilities, as well as creating assets for LGIM’s 
clients. 

·      LGI is a market leader in UK protection and US brokerage term life insurance,
and provides significant Solvency II benefits to the Group by partially offsetting
new business strain in LGRI and LGRR. Additionally, the business facilitates LGRI’s
US PRT transactions which are written onto the existing US  balance sheet, which
supports the term business.

The synergies within our businesses drive profits and fuel future growth, allowing
the Group to regularly deliver an ROE of c.20%.

**Outlook                                                                       **

Our strategy and growth drivers have delivered consistently strong returns, both
dividend and ROE, for our shareholders and we are confident they will continue to
deliver growth in H2 and further into the future to support our pursuit of inclusive
capitalism. Between 2011 and 2015 we achieved an EPS CAGR of 10% per annum, and 
we are on track to deliver at least a similar performance out to 2020, having already
delivered a CAGR of 11% since 2015. As previously reported, Legal & General is well
placed to grow organically, which we will continue to enable through ongoing judicious
investment in technology across the Group.

Our confidence in future growth and dividend paying capacity is underpinned by the
Group’s strong balance sheet with £5.9bn in surplus regulatory capital and significant
buffers to absorb a market downturn. We have a proven operating model which is reinforced
by robust risk management practices.

We are confident in the resilience of our balance sheet and operations to the foreseeable
range of Brexit outcomes. We have extensively tested and prepared the balance sheet,
building a globally diversified asset portfolio with only 23% of our annuity bond
portfolio invested in UK-listed corporate credit, many of these being multinationals.
Operationally, we have Brexit contingency plans at full readiness. For example, 
LGIM has secured the relevant authorisation for our EU asset management company 
in 2018 and has transferred all EU regulated funds. We will continue to monitor 
the market as Brexit unfolds in order to robustly manage our businesses and asset
portfolio and capitalise on opportunities to support UK growth.

LGR’s Institutional (LGRI) business participates in the rapidly growing global pension
risk transfer (PRT) market, focussing on corporate defined benefit (DB) pension 
plans in the UK, the US, the Netherlands, Ireland, and Canada, which together have
more than £5tn of pension liabilities. 

Our primary market, the UK, is the most mature; however, it still represents an 
enormous opportunity as only c.8% of the £2.2 trillion of UK DB pension liabilities
have transferred to insurance companies. UK pension advisers estimate more than 
£60bn of demand for bulk annuities within the next two years and they expect that
number will continue to grow, against c.£30bn of annual insurer capacity. In order
to better address demand from pension schemes, we have bolstered our structuring
expertise in order to develop capital-light solutions. We have a strong UK pipeline,
actively quoting on more than £20bn of transactions, having already completed a 
further £923m of new UK PRT in July 2019.

The US represents a significant market opportunity, with $3.5 trillion of DB liabilities,
of which only c.5% have transacted to date. In H1 we wrote our first fully retained
transaction for more than $200m, heralding a new phase of growth for our US business.
We expect increased volumes in the second half of the year, when we have historically
seen more activity. We have already written a further $477m of US transactions in
July 2019 and we are currently quoting on $2bn of US PRT transactions. In April 
2019, we wrote our first deal in Canada through our Bermuda-based reinsurer, Legal&
General Re. As always, we will remain disciplined in the deployment of our capital,
and will only select PRT and longevity opportunities that meet our return targets.

Ageing demographics have meant that LGR Retail’s (LGRR) target market continues 
to expand, both in terms of the numbers of retirees and the levels of wealth they
hold. The potential of the Lifetime Mortgage (LTM) market is vast, with £1.8tn of
housing equity owned by UK individuals over the age of 55. Over the first half of
2019 the market has seen a slight slowdown in the growth of total LTM lending, however,
we do not anticipate a change in the long-term growth trend. During Q1 our volumes
were down due to increased competition, however, by Q2, our quarterly market share
recovered to 29%.^(11) To further bolster our LTM offering and profits, in H2 we
plan to launch our Retirement Interest-Only Mortgage to address the growing number
of individuals reaching retirement with interest-only mortgages. In annuities, LGRR
continues to benefit from ongoing improvements to its enhanced annuity offering 
which, together with further customer service innovation, will allow us to compete
effectively in the retail annuity market. Separately, LGRR works closely with LGIM
Workplace and Personal Investing to deliver a broader range of retirement solutions
to customers.

As in previous years, we will review our longevity trend assumptions against updated
experience data and intend to make any amendments, as necessary, in H2 2019 to reflect
our analysis of the next set of mortality tables (CMI 2017) and our specific data.
Our analysis continues to show evidence of higher than forecasted mortality, which
is effectively embedded future profit. At this stage in our review of the CMI 2017
mortality tables, we anticipate a mortality reserve release of over £200m in our
2019 full year results.

LGIM continues to benefit from global trends in retirement saving and the structural
shifts in demand being experienced by the asset management industry. This is driving
an increase in customer appetite for our diverse range of products and broad investment
capabilities spanning index, active, multi-asset and alternatives, underpinned with
a thoughtful approach to ESG. The strong customer and strategic alignment of Legal&
General’s business units will remain a positive source of funds for LGIM.

The business continues to grow in the UK, which has been the bedrock of the firm’s
success to date. LGIM is a leading player in providing DB de-risking solutions and
the market leader in UK DC with total assets of £86.4bn (H1 2018: £64.0bn). We are
planning for the future, by broadening our DC proposition and through further expansion
in international markets.

International AUM has grown by a 28% CAGR since 2014 and is now at £342.8bn (H1 
2018: £229.3bn). In H1 2019 we secured a £37bn passive mandate with the Japan Government
Pension Investment Fund, providing a long term foundation for future growth in Japan
and the broader region. This establishes LGIM as a top 3 non-domestic manager in
the Japanese institutional pension market. Overall, we expect international inflows
to continue in the second half of 2019 as we leverage our growing presence in Europe,
Asia, the Gulf and the US.

We will continue to invest in a disciplined way in areas of the business where we
expect to see future growth opportunities and we will also invest in areas where
automation and simplification will generate operational leverage and efficiency.
Enhancing customers’ digital experience, optimising our investment platforms, and
utilising data analytics are at the forefront of our endeavours.

Michelle Scrimgeour joined LGIM as CEO in July 2019 from Columbia Threadneedle, 
where she was CEO for EMEA. Michelle is spending time getting to know the business
and is reviewing LGIM’s strategy. She will provide an update at the March 2020 annual
results.

LGC uses shareholder capital to achieve three clear goals. The first is to deliver
attractive financial returns for our shareholders by creating real assets and leveraging
Legal & General’s existing businesses, our network of relationships, our brand, 
and our expertise. The second is to self-manufacture matching adjustment eligible
assets for LGR’s growing annuity business. Our ability to invest in equity and debt
like instruments uniquely positions us to unlock attractive returns. Finally, LGC’s
asset sourcing provides third party opportunities for LGIM. LGC will continue to
seek opportunities to deploy its long-term capital in real assets, primarily across
the UK, where we see an enduring need for private long-term capital for future cities,
housing, and innovative funding for SMEs and early stage enterprises.

Our Future Cities portfolio has invested in 12 cities across the UK and we expect
to invest further in these locations and others. The recent announcement of our 
partnership with Oxford University is an example of our ability to make meaningful
investments in UK cities. Working closely with LGIM Real Assets and with partners
around the UK, LGC will continue to apply capabilities in infrastructure, clean 
energy, commercial real estate and residential property in order to create real 
assets for LGR’s growing asset portfolio. Legal & General Group is well placed to
bring together on-balance sheet or third party private capital with the development
capability to make a difference to UK cities.

LGC’s housing platform continues to grow its diversified, multi-tenure business 
across build-to-rent, build-to-sell, later living and affordable housing. In our
build-to-sell arm, CALA, which has achieved revenues of over £400m in H1 2019, continues
to build its business under LGC’s ownership. Within our Affordable housing business,
our first affordable housing contract became operational in Croydon. The affordable
market remains highly attractive with more than 1.3 million households on UK waiting
lists for housing, with new additions to the housing stock averaging only c.30,000
properties a year over the last 10 years. LGC plans to deliver 3,000 affordable 
homes per year within the next four years. As a registered provider of social and
affordable housing, we have focussed on accelerating our business plan to develope,
hold and manage a blend of affordable housing tenures which include both social 
and affordable, rent and shared-ownership homes under grant-supported schemes. 

In SME Finance, we expect to continue to deploy our capital and focus to support
the UK venture ecosystem to help create the businesses of tomorrow, whilst continuing
our support of Pemberton in the provision of private credit to the European mid-
market. 

In LGI, we anticipate continued premium growth across our UK and US businesses. 
LGI operating profits in H2 2019 are expected to exceed those of H1, resulting in
a full year operating result which is in a similar range to that of the prior year.

Our UK group protection business typically generates more new business strain in
H1 as scheme renewals often coincide with the start of the calendar or tax year,
followed by release from operations in the following periods. This new business 
pattern typically leads to H2 profits exceeding H1 profits. In our market leading
UK retail protection business we expect to continue growing premiums and to generate
good profits in H2, supported by distribution and product enhancements.

LGI’s US protection H1 new business annual premiums were slightly down, reflecting
increased competition over the period. We expect our on-going investment in digital
transformation to result in new business growth while maintaining healthy profits.

In LGI Fintech we expect continued growth from SalaryFinance both in the UK and 
the US as the business gains access to more employees and diversifies the products
and services offered. We also expect our investments and developments in the UK 
mortgage market to deliver growth as we make the journey to buy and finance a house
easier and more efficient for everyone involved.

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