Legal & General Group Plc

Half year results 2017 Part 1

Stock Exchange Release                                                                                                          

09 August 2017                                                                                                   

Strong financial performance in h1 2017: profit before tax¹ up 41% to £1.2bn

financial highlights²: 

·      OPERATING PROFIT up 27% to £988M (H1 2016: £777m)

·      Profit after tax UP 43% to £952m (H1 2016: £667m)

·      Earnings per share up 41% to 15.94P (H1 2016: 11.27p)

·      Interim dividend³ of 4.30p per share (H1 2016: 4.00p)

·      Net release From operations for Retained business⁴ up 6% to £724m (H1 2016: 


£681m)

·      return on equity⁵ of 26.7% (H1 2016: 20.6%)

·      SOLVENCY II SURPLUS⁶ INCREASED BY £1.0BN TO £6.7BN (FY 2016: £5.7BN)

·      SOLVENCY II COVERAGE RATIO⁶ OF 186% (FY 2016: 171%)

·      H1 2017 Results include base mortality release⁷ of £126m

business highlights: 

·      lgr PRT⁸ new annuity business of £1.6bn (H1 2016: £0.7bn)

·      lgr retail⁹ total sales UP 98% to £769m (H1 2016: £389m)

·      LGIM AUM UP 13% AT £951.1BN (H1 2016: £841.5BN)

·      LGIM EXTERNAL Net inflows of £21.7bn (H1 2016: £9.6bn)

·      GROUP-WIDE DIRECT INVESTMENT UP 48% AT £11.8BN (H1 2016: £8.0bn)

·      LGI GROSS PREMIUMS UP 6% TO £1,338M (H1 2016: £1,260M)

Nigel Wilson, Group Chief Executive, said:

"L&G delivered 41% growth in EPS to 15.9p, 41% growth in profit before tax to £1.2 billion and a 26.7% Return on Equity. This includes a base mortality release of £126m as part of our review of longevity assumptions. Our consistently improving financial performance is due to: investing for the long term in our market leading businesses, excellent execution by my colleagues and delivering value for customers.

Our strategy, based around six long term macro and demographic growth drivers, not only allows us to grow L&G's business, but also the scale of our long term capital enables us to support inclusive growth across the UK. We are replicating our successful UK model with measured expansion in the US, where we are experiencing increasing customer acceptance and an ever improving financial performance.

Our business model has proven to be resilient to political, economic and regulatory uncertainties. We are not being complacent as we recognise that there are currently some structural weaknesses in the UK economy. Notwithstanding this we have tremendous momentum across our business, a strong AA- rated balance sheet and increasing access to global growth opportunities, therefore we remain confident in our ability to deliver growth."

1.    Represents profit before tax attributable to equity holders.

2.    The metrics within the Group's financial highlights are defined in the glossary, which includes Alternative Performance Measures, on pages 101 to 105 in this report.

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

4.    Excludes businesses disposed of comprising Legal & General Netherlands, Suffolk Life, Cofunds and IPS.

5.    Return on equity is calculated by dividing annualised profit after tax attributable to equity holders of the Company (twice the half-year number), by the average of shareholders' equity during the period.

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

7.    IFRS impact from base mortality release in LGR's £45.5bn of net longevity exposure.

8.    PRT (Pension Risk Transfer) represents bulk annuities bought by entities that run final salary pension schemes to reduce their responsibilities by passing the assets and obligations to insurance providers. Figures disclosed exclude back-book transactions.

9.    LGR Retail comprises the division's individual annuities and lifetime mortgage businesses (Legal & General Home Finance).

FINANCIAL SUMMARY

1.  In H1 2017, we invested £12m (H1 2016: £16m) to deliver a reduction in operating costs and management expenses, to increase efficiencies and develop strategic initiatives.

2.  Includes net profit on disposals in H1 2017 of £17m in relation to the disposal of Legal & General Netherlands (H1 2016: £4m profit in relation to the disposal of Suffolk Life). Cofunds and IPS disposal completed on 1 January 2017, however these businesses were classed as held for sale at 2016 year end with a £64m impairment loss recognised in the 2016 full year results.

3.  Return on equity is calculated by dividing annualised profit after tax attributable to equity holders of the Company (twice the half-year number), by the average of shareholders' equity during the period.

4.  Disposed operations comprise Legal & General Netherlands, Suffolk Life, Cofunds and IPS.

5.  Represents subsidiary dividend from LGAS to Group, in addition to normal LGAS dividend, arising due to base mortality release in H1 2017.

commentary on H1 2017 financial performance

Income statement

Operating profit increased 27% to £988m (H1 2016: £777m), demonstrating the continued successful execution of our strategy. 

LGR delivered a 40% increase in operating profit to £566m (H1 2016: £405m) driven by strong performance from our front and back books in LGR's Corporate and Retail divisions. This was supported by continuing greater than expected mortality experience and we have chosen to reflect that in our base mortality, contributing to a release of £126m. Excluding the base mortality release, growth in operating profit remained strong at 9%.

LGIM operating profit increased by 13% to £194m (H1 2016: £171m). Management fee revenues were up 15% to £382m (H1 2016: £332m) driven by strong external net inflows of £21.7bn (H1 2016: £9.6bn), and higher asset values throughout H1 2017. This was partially offset by planned investment to grow the business in our target international markets.

LGC operating profit increased by 5% to £142m (H1 2016: £135m) driven by growth in the overall equity portfolio size within the division's £3.9bn traded assets, and continued strong performance in the £1.3bn direct investment portfolio. Direct investments delivered £69m (H1 2016: £68m) operating profit.

LGI operating profit was flat year-on-year at £151m (H1 2016: £151m). US Protection operating profit increased 33% to £57m (H1 2016: £43m) driven by business growth and favourable mortality experience. This was offset by UK Protection operating profit decreasing by 13% to £90m (H1 2016: £103m) driven by adverse experience of £26m in our group protection business, which we previously highlighted in our full year 2016 results. UK retail protection continued to generate good profits through consistent performance.

General Insurance operating profit decreased 52% to £15m (H1 2016: £31m), primarily due to higher than expected costs from non-weather related claims in Q1, predominantly escape of water, in line with wider market experience.

Mature Savings operating profit remained robust at £52m (H1 2016: £55m) as we focus on managing costs whilst maintaining customer service levels.

Profit before tax attributable to equity holders increased 41% to £1,163m (H1 2016: £826m).

Profit before tax increased on the back of the 27% increase in operating profit. In addition, positive investment and other variances contributed £175m (H1 2016: £49m), demonstrating diversification benefits across the Group. This included £52m (H1 2016: £60m) primarily from the traded assets portfolio in LGC through outperformance of long term economic assumptions, as well as profit on disposals realised in the direct investments portfolio. Additionally, consistent with prior years, there was an accounting gain driven by the Group's defined benefit pension scheme reflecting accounting valuation differences arising on annuity assets held by the scheme. These gains were partially offset by a number of smaller variances in other divisions in the Group.

In H1 2017, the Group had a net profit on disposal of £17m (H1 2016: £4m) following the sale of Legal & General Netherlands in April.

Net release from operations for retained business¹ increased 6% to £724m (H1 2016: £681m), comprising £683m (H1 2016: £609m) release from operations and £41m (H1 2016: £72m) new business surplus. The prior year new business surplus, in H1 2016, benefitted in particular from the £2.9bn Aegon back-book transaction in LGR.

The base mortality release in H1 2017 resulted in an additional £100m subsidiary dividend to be remitted to the Group, contributing to a total release of £824m (H1 2016: £727m).

balance sheet

The Group's Solvency II surplus increased by £1.0bn to £6.7bn (FY 2016: £5.7bn) in the six months from the 2016 year end.

Our Solvency II coverage ratio² increased to 186% at H1 2017 (FY 2016: 171%), with net surplus generation contributing 6.0%. On a proforma calculation basis², our Solvency II coverage ratio increased from 165% at the end of 2016 to 180% at H1 2017. The surplus is the same on both bases. The Group remains focused on delivering appropriate returns on capital. In H1 2017, our Solvency II new business strain was £0.1bn.

The above incorporates management's estimate of the impact of recalculating the Transitional Measures for Technical Provisions (TMTP) as at 30^th June 2017 as we believe this provides the most up to date and meaningful view of our Solvency II position. In line with PRA guidance, a formal recalculation of the Group's TMTP will take place no later than 1^st January 2018.

1.   Excludes businesses disposed of comprising Legal & General Netherlands, Suffolk Life, Cofunds and IPS.

2.   Solvency II coverage ratio on a shareholder basis excludes the SCR of the With-profits fund and the final salary pension schemes from both the Own Funds and SCR. The proforma calculation basis includes these items.

outlook

The Group's strategy is aligned to our six established long term growth drivers of: ageing demographics; globalisation of asset markets; creating new real productive assets; reform of the welfare state; technological innovation; and providing "today's capital". Our focus on attractive high growth markets, where we can leverage our expertise, and the clear synergies between our core divisions is expected to deliver further profit growth in the future. Our financial ambition is to achieve a similar performance in 2016-2020 as that achieved in 2011-2015; where EPS grew by 10% per annum and net release from operations by 10% per annum. We made a good start in 2016 with EPS rising by 17% and net release from operations by 12%. This has continued with a strong performance in H1 2017.

Although no business model can be fully immunised to market volatility, we believe the opportunities available to the Group, primarily in the UK and US, remain largely unchanged. Despite a number of potentially destabilising events in H1 2017 including a snap UK general election and the start of Brexit negotiations with the EU, our successful performance continues to demonstrate the resilience of our operating model and our focus on the excellent execution of our strategy.

In LGR, demand for pension de-risking strategies remains strong. We are currently quoting on c.£12bn of buy-in and buy-out deals in the UK, and in our US Pension Risk Transfer (PRT) franchise we continue to build on recent successes. The individual annuity market is growing post "Pension Freedoms" driven by demographic and regulatory trends. Our Aegon distribution agreement signed in October 2016 has delivered good levels of new business in H1 2017 in addition to our existing arrangements, and we expect to see continued positive growth in individual annuity sales in H2 2017. We have a 30% market share in lifetime mortgages with market volumes expected to grow to £3.0bn in 2017. With regard to reserving, as part of our normal processes, we will review the appropriateness of our longevity improvement assumptions at the year end. Based on our current view of the data and level of certainty, if recent mortality improvement experience continues, we would expect to fully reflect this in our assumptions over several years as the credibility of the data increases.

LGIM expects to maintain growth across the business. We are well placed to continue being a market leader in supporting Defined Benefit (DB) pension schemes as they de-risk. LGIM is gaining market share in the UK Defined Contribution (DC) and Retail markets. We expect the US business to continue its rapid growth and we are successfully expanding in other target regions. We will also continue to invest in technology and overseas distribution. LGIM has established a resilient business model that is well positioned to deal with the challenges facing the industry such as the FCA Asset Management Market Study, MiFID II and Brexit negotiations.

LGC is broadening its business and so far this year has committed over £200m in investment across all its chosen sectors. In Housing, CALA's growth outlook remains strong, and to complement this we are also expanding into Later Living and are reviewing opportunities in Affordable Housing. In Infrastructure, we are continuing to progress our strategic urban regeneration developments. In SME finance, Pemberton will be launching further new funding initiatives in H2 2017. We are also on track to meet our sales proceeds target of c.£250m from asset disposals, and our year-to-date sales have been achieved at or above our target IRR's. LGC's £3.9bn traded asset portfolio outperformed our long term assumptions in H1 2017.

In LGI, we expect to maintain good growth from US new business sales with H1 2017 17% higher than H1 2016. During H1 2017 our US business, in collaboration with colleagues from LGI UK, launched a direct to consumer sales channel including online apply, and work is ongoing to deliver digital transformation. In the UK we will continue to focus on the turnaround of our UK group protection business and growing our market leading retail protection business. We expect these management actions to become evident in H2 2017. We are confident the division will deliver growth in profits and gross premiums in H2 2017.

In General Insurance, we are growing the business, having won a number of new distribution agreements, and remain on track to deliver a c.10% increase in gross premiums in 2017. We are also developing new digital solutions for our customers. The actions taken on escape of water are expected to deliver improved profitability in future periods.

Our Mature Savings operation is largely closed to new business. We will continue to focus on customer service whilst actively managing costs on our £30bn assets under administration.

DIVIDEND

Legal & General has a progressive dividend policy reflecting the Group's expected medium term underlying business growth, including net release from operations and operating earnings. There is no change to this dividend policy.

In line with Group's policy of using a formulaic approach to setting the interim dividend, being 30% of the prior year full year dividend, the Board has declared an interim dividend of 4.30p per share.
 

LEGAL & GENERAL RETIREMENT

1.  The £800m quoted represents the notional size of the transaction and is based on the present value of the fixed leg cashflows discounted at the LIBOR curve.

operating profit up 40% to £566m

LGR had a strong H1 2017 achieving further growth in profits and total new business volumes of £3.2bn (H1 2016: £4.0bn).  

Release from operations increased 25% to £256m (H1 2016: £204m), reflecting the expected release of prudential margins from our growing £55.6bn annuity fund.

Net release from operations increased 8% to £307m (H1 2016: £283m) with new business surplus of £51m (H1 2016: £79m). New business surplus benefitted from securing attractive spreads on direct investments including lifetime mortgages, while H1 2016 benefitted in particular from the £2.9bn Aegon back-book transaction.

We achieved Solvency II new business strain of less than 4% against £1,964m new annuity business in H1 2017, within our target low to mid single digit range. UK annuity sales delivered a 8.9% new business margin on Solvency II capital.

Operating profit increased to £566m (H1 2016: £405m) driven by strong performance in the front and back books of LGR's Institutional and Retail divisions. Additionally, mortality experience for LGR's annuity book has been greater than expected for a number of years and we have chosen to reflect that in our base mortality, with a release of £126m of prudence within our reserves.

LGR's gross longevity exposure is £61.4bn across annuity and longevity insurance business. We have reinsured £15.9bn of longevity risk with 11 reinsurance counterparties, leaving a net exposure of £45.5bn. 

LGR, in line with the industry, has two principal assumptions in relation to longevity: the level of mortality currently being experienced by pensioners (often referred to as "base" mortality), and the rate at which mortality will change in the future (the "improvement" or "trend" assumption). In preparing the half year results, we have not adjusted our assumptions for the rate of future longevity improvement; they remain consistent with those disclosed last year. As part of our normal processes we will review the appropriateness of longevity improvement assumptions at the year end. There is increasing evidence that the higher than expected level of recent mortality is in part due to medium or long-term influences rather than short-term events. In performing this review, consideration will be given as to whether, and over what period, to move to newer versions of the CMI model. We would expect to continue to apply caution in our assessment of the sustainability of any reduction in mortality improvements, with any release being recognised over several years as greater certainty emerges on the continuation of positive experience.

increasing demand for de-risking strategies

The need for products and services as a consequence of ageing populations is increasing, and our strategy is to be at the forefront of providing those products and services. Our core business themes of Global PRT for our institutional customers and Individual Retirement Choices for our retail customers are there to meet these substantial and growing needs.

LGR Institutional - Global PRT

In H1 2017, LGR Institutional completed £1,619m (H1 2016: £685m) of bulk annuity transactions and a longevity insurance transaction of £800m.

The UK pension de-risking market has made a steady start in 2017 with increased activity anticipated in H2. LGR closed a number of significant buy-ins and buy-outs in H1 2017, with UK PRT bulk annuity sales up £0.9bn to £1.5bn (H1 2016: £0.6bn). Of this, just under £1bn of assets transferred from liability driven investment (LDI) and fixed income customers in LGIM, further demonstrating the strength of L&G's de-risking proposition. In the US we completed three bulk deals in H1 2017 totalling $141m premiums. We also completed an £800m longevity insurance transaction in June 2017 which we have fully reinsured. We operate a capital efficient model, reinsuring approximately 80% of longevity risk on new UK PRT business to our panel of reinsurers.

We are currently quoting on c.£12bn of UK buy-in and buy-out deals. Whilst lower real yields increase the average pension fund deficit, the impact on pension funds depends on the amount of LDI hedging they have done, the extent to which equities have been switched to bonds, and the extent to which equities have been diversified globally, with or without currency hedging. We estimate that c.50% of the interest rate and inflation risk has been removed from the UK private sector defined benefit sector.

Legal & General is unique in being able to offer all possible pension risk transfer and DB pension de-risking solutions. We are recreating this disciplined approach in the US, with our US PRT business making further progress in 2017.

LGR Retail - Individual Retirement Choices

LGR's Retail business is playing an important role in our customers' retirement planning. In volatile times, the certainty of income and access to housing wealth we provide for those approaching or already in retirement is vital. 

Individual annuity sales were up 118% at £345m (H1 2016: £158m) and LGR Retail now manages over £21bn in assets for its 550,000 individual annuity customers. In October 2016 we agreed to be Aegon's preferred supplier of annuity business and together with improved sales performance in the wider individual annuity sector, we remain on track to achieve further growth in H2 2017.

The combination of Freedom & Choice in Pensions and Solvency II has resulted in consolidation among individual annuity providers. We expect there to be further back-book consolidation opportunities over time and we will consider these as and when they arise.

Legal & General Home Finance has had a strong H1, writing £424m of lifetime mortgage advances in H1 2017 (H1 2016: £231m) representing a 30% market share, and now has approximately 16,000 customers in our market leading business. Our portfolio has an average customer age of 70 and the weighted average loan-to-value is c.28%. With an estimated £1.5 trillion of housing equity currently owned by the over 55s in the UK, the long-term growth characteristics of this market are strong, and we expect the market volume to reach £3bn in 2017, up from £2.2bn in 2016. We are also delivering solutions for customers with maturing interest-only mortgages.

ONGOING credit and ASSET management

Credit portfolio management

LGR's £55.6bn asset portfolio backing its IFRS liabilities is well diversified. Within the £51.5bn bond portfolio, just over 2/3rds of the portfolio is A-rated or better, 30% BBB-rated and 1% sub-investment grade. The bond portfolio has 14% in gilts, 4% in Banks, and 4% in Energy, Oil & Gas. It is an objective of our fixed income fund managers in LGIM to manage the portfolio such that credit downgrades and defaults are avoided. We hold £2.7bn of IFRS credit default reserves against these assets.

Direct Investment

Our direct investment portfolio is secured through directly negotiated covenants and security or collateral. In H1 2017, LGR invested over £1.4bn in direct investments, including infrastructure, housing and lifetime mortgages. This portfolio is now £9.8bn (H1 2016: £6.6bn) including £1,433m in lifetime mortgages, and makes up c.15% of the assets within the annuity portfolio. The PRA has reviewed and approved the use of internal ratings within our Matching Adjustment (MA) process and c.59% of the direct investment portfolio is rated A and above. 

With the Group's balance sheet size and the long term nature of LGR's liabilities, LGR is able to invest in assets of size and term that differentiates it from many other investors. The ability to self-manufacture attractive assets to back the annuities book, working with LGIM, LGC, or through lifetime mortgages, is an important feature of LGR's business.

LEGAL & GENERAL investment management

1.   Management fee revenue and total costs exclude income and costs of £8m in relation to provision of 3rd party market data (H1 2016: £5m each; FY 2016: £14m each).

2.   Represents Workplace Savings admin only and excludes fund management profits.

3.   Excluding Workplace Savings.

4.   Legal & General Netherlands disposal completed on 6 April 2017.

5.   Assets under management include overlay assets, which represent the notional value of derivative instruments on which LGIM earns fees. Fees are charged on notional values and as such are not subject to positive or negative market movements.

operating profit up 13% to £194m

LGIM continues to expand its business across channels, regions and product lines. External net flows were strong at £21.7bn (H1 2016: £9.6bn), contributing to 13% growth in assets under management (AUM) to £951.1bn (H1 2016: £841.5bn). Revenues from management fees were up 15% to £382m (H1 2016: £332m), while transactional revenues were lower at £12m (H1 2016: £16m). Operating profit increased by 13% to £194m (H1 2016: £171m), reflecting AUM growth from flows and asset values, partially offset by planned investment to grow the business.

Workplace savings achieved a break-even operating result in H1 2017 (H1 2016: £(3)m), demonstrating increasing efficiencies as the platform continues to grow. This result is for the administration business only and the profits on the fund management services provided are included in the LGIM result.

The International business experienced strong net inflows of £17.9bn (H1 2016: £6.7bn) with all regions producing positive net flows. The DC business continued to expand, with total net inflows of £1.7bn (H1 2016: £0.8bn) driven by our bundled business, which offers investment and administration services to DC schemes. We are now the largest manager of DC assets in the UK. The retail business experienced net inflows of £1.7bn (H1 2016: £0.7bn) and was ranked first in UK net sales in Q2 2017 (Source: Pridham). 

breadth of investment management solutions

1.  Legal & General Netherlands disposal completed on 6 April 2017.

Total AUM increased 13% to £951.1bn (H1 2016: £841.5bn). Total external net inflows of £21.7bn (H1 2016: £9.6bn) represent c.2.4% of opening AUM. Positive flows across all channels, regions and most product lines demonstrate the breadth of LGIM's business model. LGIM delivered consistent strong performance for its active clients, with the majority of our funds outperforming their respective benchmarks over the past one, three and five years.

Solutions external net inflows were £20.4bn (H1 2016: £9.4bn), driven by DB pension schemes implementing a broader range of Liability Driven Investment (LDI) strategies, and DC schemes and retail customers seeking a range of Multi-Asset strategies. The de-risking of DB schemes presents the business with considerable opportunities, taking clients from traditional Index strategies, through LDI capabilities, to Solutions that combine LDI, Credit, Multi-Asset and Real Asset strategies, as well as PRT transactions in LGR.

Index external net outflows were £4.3bn (H1 2016: £2.4bn outflow). Net outflows were once again largely from UK DB clients switching to other products, primarily Solutions. However, there were strong net inflows from international and Retail clients as the Index business continues to expand in other channels and regions.

Net external inflows into Active Fixed Income of £5.3bn (H1 2016: £2.6bn) were driven primarily by institutional clients in the UK and US, and demand continues to grow from clients in other regions. 

The Real Assets business has continued to expand, with especially strong growth in private credit. LGIM originated over £1bn of investments across real estate, infrastructure and corporate debt. LGIM continues to see success with its Build to Rent fund, with c.£1bn of capital raised. Real Assets AUM has grown to £21.2bn (H1 2016: £18.4bn).

The Retail business has performed well as the AUM increased to £26.8bn (H1 2016: £21.4bn) and the business has gained market share. 

largest uk dc asset manager - £63bn aUM

LGIM has experienced a 20% increase in customers on its Workplace platform, with the number of members now 2.4m (H1 2016: 2.0m). Our Master Trust is the second largest and fastest growing in the UK. Net inflows into our workplace platform were £2.8bn (H1 2016: £1.8bn) and assets are now £24.9bn (H1 2016: £17.3bn). The number of pension schemes supported by the DC business has grown to 12,234 (H1 2016: 6,844). Total UK DC AUM increased by 26% to £62.8bn (H1 2016: £49.8bn). 

INTERNATIONAL assets up 31% to £198bn 

LGIM's international businesses experienced record net inflows of £17.9bn (H1 2016: £6.7bn). Once again positive net flows took place in all regions. Net inflows in the US business were £8.6bn (H1 2016: £3.1bn) across Solutions, Active Fixed Income and Index funds. Net inflows were £6.6bn in Europe (H1 2016: £1.5bn), £2.5bn in the Gulf (H1 2016: £1.6bn) and £0.3bn in Asia (H1 2016: £0.5bn). Total International AUM was £198.3bn, a 31% increase (H1 2016: £151.9bn).

Additionally, we have established a regional office in Tokyo and trading and fund management capabilities in Hong Kong.

LEGAL & GENERAL CAPITAL

1. Direct Investment portfolio includes two LGC assets valued at £98m which are classified as debtors as contracts have been exchanged as at 30 June 2017, and for which the proceeds were received shortly following that date. In addition it excludes £25m of Group shareholder investment property.

direct investment portfolio up 27% to £1.3bn

The Direct Investments portfolio increased by 27% to £1,348m (H1 2016: £1,064m). The portfolio delivered operating profit of £69m (H1 2016: £68m) and profit before tax of £53m (H1 2016: £51m), representing an annualised net portfolio return of 8.6% (H1 2016: 10.2%).

LGC's Direct Investment portfolio delivered a solid performance in H1 2017. In particular, Infrastructure performed strongly driven by a 44% increase in the portfolio. Profit before tax increased to £53m (H1 2016: £51m) driven by the maturing profile of the portfolio which has delivered positive variances from asset disposals.

So far this year LGC has committed over £200m in investments across all the target sectors. In our Infrastructure portfolio we have invested £72m, funding the further development of our existing investments, and in our SME portfolio we have deployed £25m in Pemberton's new UK Sterling Loan Fund and have committed £22m across three new early-stage venture capital funds. Additionally, in Housing we invested £39m in August into the Later Living sector.

portfolio delivers reALISED profits FROM DISPOSALs

In H1 2017, LGC completed, or exchanged contracts for, disposals which will generate proceeds of £164m, and remain on target to achieve the full year target of £250m of disposals, representing a significant increase from 2016. Disposals have been achieved at or above our target IRRs, demonstrating our ability to generate liquidity and profits for our shareholders.

Infrastructure assets increased to £731m (H1 2016: £506m)

During H1 2017, the urban regeneration business continued to grow. Our portfolio is maturing, with profits being realised on disposals and valuations increasing as projects are developed and letting of units is achieved.

In our £400m development in Cardiff, we are now funding the development of the second office building and have completed the disposal of One Central Square which is adjacent to BBC Wales' new HQ (acquired by LGR in 2015), delivering our target IRR's. The £240m Bracknell Town Centre development (The Lexicon) is progressing well towards the planned opening in September 2017 with over 90% of the retail space now let.

MediaCityUK (Salford) is trading well, delivering a strong valuation uplift with the completion of further leasing of the estate. The Newcastle Science Central project has submitted a planning application for the first of its grade A office buildings. The 100,000 sq ft office building will create modern workspace for over 1,200 people. 

In Clean Energy, NTR¹ completed the construction of a further 3 UK onshore wind sites, taking the number of operational assets to 5 out of 11 assets. The €246m fund is 77% deployed and remains on target to be fully deployed by December 2017. We are working with NTR on the development of its second fund, expected to target €500m of equity investment in clean energy assets in H2 2017.

Housing assets increased to £416m (H1 2016: £377m)

CALA Homes² delivered another strong financial performance. In the twelve months to the end of June, CALA delivered revenue in excess of £700m representing an almost three fold increase since we acquired our shareholding in 2013.

The Build-to-Rent joint venture invested in new sites in Bath and Leeds and now has over 1,400 homes under development since inception in early 2016. Additionally, residents are now occupying the first scheme in Salford ahead of plan.

Legal & General Homes is launching the prime development in Crowthorne, Berkshire. The site has Outline Planning Permission for 1,000 new homes and building is expected to start in September once the on-site infrastructure has been delivered. Legal & General Homes Modular has produced its first units, and we have appointed a new CEO to optimise the production phase now the factory development is complete. There continues to be strong interest from prospective buyers.

SME Finance assets increased to £201m (H1 2016: £181m)

Pemberton³ continues to grow and is targeting c.€3bn of AUM growth in 2017. This year three new funds are being launched: a second Euro Fund a follow-on fund to the successful first Euro Fund with a target size of €2bn; a new Trade Receivables fund; and a Strategic Opportunities fund. 

LGC also committed £22m to three funds investing in early stage start-ups in the UK and Europe in a range of sectors including Fin Tech to establish an institutional presence in the VC market.

TRADED PORTFOLIO

LGC's traded investment portfolio, including treasury assets, delivered operating profit of £73m (H1 2016: £67m) and profit before tax of £141m (H1 2016: £144m).

The traded portfolio holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash. The portfolio has performed above assumed returns over the first half of the year, benefiting from positive global equity market performance.

1.  LGC owned a 25.0% share in the NTR fund management business and 47.0% in the NTR fund as at 30 June 2017.

2.  LGC owned a 47.9% share in CALA Homes as at 30 June 2017.

3.  LGC owned a 40.0% share in Pemberton as at 30 June 2017.

LEGAL & GENERaL INSURANCE

1.Legal & General Netherlands disposal completed on 6 April 2017.

2.Prior year investment variance of £(100)m) driven by a reduction in UK government bond yields of c.100bps which impacted the discount rate used to calculate the reserves for our UK protection liabilities.

3. H1 2017 includes a £17m gain resulting from the disposal of Legal and General Netherlands.

6% increase in Gross premiums to £1.3bn

Retail Protection gross premium income increased 5% to £609m (H1 2016: £582m) with new business annual premiums of £86m (H1 2016: £82m). We remain a leading provider of Retail Protection in the UK and benefit from a highly efficient automated underwriting model, delivering straight through processing for more than 80% of our customers, and a broad distribution reach. Our direct distribution channel continues to perform strongly and delivered Retail Protection new business APE of £16m (H1 2016: £16m) accounting for c.19% of new business APE. Group Protection gross premium income was £224m (H1 2016: £233m) with new business of £28m (H1 2016: £36m).

LGI US gross premium income increased 3% (17% on a sterling basis) to $618m (H1 2016: $601m) driven by new annual premiums increasing 17% to $48m (H1 2016: $41m). LGI US is the second largest provider of US term life assurance through the brokerage channel⁴ and has 1.2m policies in force (H1 2016: 1.2m). 

Legal & General Mortgage Club facilitated £29bn of mortgages in H1 2017 (H1 2016: £26bn) through strong partnerships with top lenders and over 10,000 mortgage brokers. As the largest participant in the intermediated mortgage market in the UK, we are involved in one in five of all UK mortgage transactions. Legal & General Surveying Services continues to deliver a strong performance, completing over 262k surveys (H1 2016: 250k). 

4.             By annual premium equivalent as at 31 March 2017.

SUSTAINED divisional operating profit and strong us growth

LGI US operating profit increased 16% (up 33% on a sterling basis) to $72m (H1 2016: $62m), due to business growth and favourable mortality experience. LGI US delivered a strong Solvency II new business margin of 12.8%.

LGI UK operating profit decreased 13% to £90m (H1 2016: £103m), as consistent performance from our UK retail protection business was offset by the previously anticipated adverse experience of £26m in group protection, where our use of reinsurance is significantly lower than on our retail protection book leading to greater volatility in claims results.

The adverse experience arose primarily in a relatively small number of income protection schemes. A range of actions have been taken to address the issues arising, including pricing action at scheme renewals. The impact of these actions will take time to be fully reflected in our experience, so we expect some adverse experience to continue emerging but at a reduced level in the second half of 2017.

Retail protection continued to generate good profits reflecting the consistent performance of this business and its leading market position in 2016. We continue to develop our Retail Protection proposition and enhance our underwriting approaches to place us in a strong position to win additional distribution deals in order to support our market share and profitability levels.

UK protection sales delivered a 9.1% new business margin on Solvency II capital reflecting competitive pressures in both UK markets.

Net release from retained business in LGI increased by 9% to £169m (H1 2016: £155m). LGI US net release from operations increased by 14% (31% on a sterling basis) to $100m (H1 2016: $88m). This represents the annual dividend paid by LGI US to the Group in February 2017.

Digital innovation

Our UK retail protection business benefits from high levels of automation and self-service capabilities which we have continued to enhance during 2017 with further functionality delivered to our advisers. We are also increasingly using predictive analytics and improved underwriting approaches to reduce the time it takes for advisers and their customers to apply for policies. The digital transformation of our US Protection business is just beginning but will catch up fast, fully using the wealth of experience and capabilities we have from digitising our UK business. Our focus in 2017 is developing online applications including automated underwriting to deliver a better customer experience, scalability, reduced unit costs and enhanced risk management.

Our use of innovative digital marketing approaches has been helping us engage more effectively with customers, contributing to a 56% increase in direct business over the last 3 years. Further significant focus on this area, in both UK and US, will take place in H2 2017 and subsequent years as we use the latest technology and techniques to improve customer engagement. LGI recently launched an easy and engaging way to obtain a life insurance quote in the US. SelfieQuote.com provides a life insurance estimate by determining an individual's age, and body mass index (BMI) using a selfie photo. We are the first in the life insurance industry to roll out this approach, which is an example of how technology can improve the application process for consumers.

We see increasing opportunities for technology innovation to help customers engage with financial services. To pursue these growth opportunities we have recently established a Fintech business area within LGI that will include our existing fintech business, Investment Discounts Online (IDOL), and other fintech start-up businesses that we will fund and collaborate with.

General Insurance

11% growth in gross premiums to £173m

Gross premiums increased 11% to £173m (H1 2016: £156m) despite the pressures of a competitive market. Our direct business delivered gross premiums of £63m in H1 2017, representing 17% growth on H1 2016 and now accounts for 36% of gross premiums (H1 2016: £54m, 35% of gross premiums).The General Insurance business has won five distribution agreements in the last two years with UK financial institutions. We are on track to increase gross premiums by over 10% by the end of 2017.

Operating profit decreased to £15m (H1 2016: £31m) with a combined operating ratio of 95% (H1 2016: 85%). This was primarily due to increased costs from non-weather related claims in Q1, predominantly escape of water, in line with wider market experience. We have taken action across pricing, underwriting and claims management to address this and have seen improved claims experience in Q2. We will continue to monitor this closely and will take further action if required. In contrast, the H1 2016 comparator benefitted from better than expected claims experience during that period.

savings

1.  Disposed operations comprises Suffolk Life which was sold on 25 May 2016, and Cofunds and IPS which was sold on 3 January 2017.

2. H1 2016 includes a £4m gain resulting from the disposal of Suffolk Life.

robust operating profit

Net release from operations was higher reflecting market conditions, with lower new business strain as the book declines.

Operating profit in Mature Savings remains robust at £52m (H1 2016: £55m). Reducing unit costs, whilst maintaining customer service levels, has been achieved through the introduction of robotics, and further automation.

Mature Savings had outflows of £(1.5)bn (H1 2016: £(1.3)bn), with assets under administration of £30.2bn in H1 2017 (H1 2016: £29.4bn). 

Mature Savings outflows increased year on year due to our products' maturity profile. Since the introduction of the Pensions Reform legislation we have seen an increase in the proportion of customers wishing to take their pension pots as cash withdrawals, with c.80% electing to take cash payments. Our average payment size is £14k.

Disposals

On 6^th April 2017, the Group completed the sale of Legal & General Nederland Levensverzekering Maatschappij N.V. to Chesnara plc for total consideration of €161m resulting in a £17m profit on disposal.

On 1^st January 2017, the Group completed the sale of Cofunds and IPS to Aegon for total consideration of £147.5m. The Cofunds business was acquired in stages between 2005 and 2013, for a total cash consideration of £153m. Investment in Cofunds subsequent to the acquisition as well as our IPS platform, including capitalised costs in respect of the Retail Distribution Review, resulted in an impairment loss of £64m recognised in 2016.

The impact of these disposals improved the Group's H1 2017 Solvency II coverage ratio by 2.5%. 

borrowings

Legal & General continues to have a strong liquidity position including amounts required for working capital and derivative collateral purposes. The Group's outstanding core borrowings total £3.5bn (H1 2016: £3.1bn). There is also a further £0.6bn (H1 2016: £0.4bn) of operational borrowings including £0.2bn (H1 2016: £0.2bn) of non-recourse borrowings.

The Group accessed the US dollar market in March 2017 for the first time and issued $850m of Tier 2 subordinated debt with a coupon of 5.25%. The proceeds were utilised to refinance the Group's £600m Tier 1 notes with a coupon of 6.385% which were called in May 2017. This inaugural issue has given the Group access to an alternative source of debt financing away from the Group's traditional European institutional investor base. In April 2017 the Group accessed the US dollar market again when it issued $500m of Tier 2 subordinated debt in private placement format with a coupon of 5.55%, reflecting the longer duration compared to the March 2017 issue.

Group debt costs of £92m (H1 2016: £86m) reflect an average cost of debt of 5.0% per annum (H1 2016: 5.4% per annum) on average nominal value of debt balances of £3.7bn (H1 2016: £3.2bn).

taxation - effective tax rate of 18.1%

In H1 2017, the Group's effective tax rate was lower than the UK corporation tax rate. This reflects the overall positive impact from differences between the measurement of accounting and taxable profits.

SOLVENCY II

As at 30^th June 2017, the Group had an estimated Solvency II surplus of £6.7bn over its Solvency Capital Requirement, corresponding to a Solvency II coverage ratio of 186% on a shareholder basis.

1.   Solvency II position on a shareholder basis and before the accrual of the 2017 interim dividend (H1 2017) and 2016 final dividend (FY 2016).

The increase in surplus reflects the surplus generated over the first six months of 2017 net of dividends paid of £0.6bn and interest payments on the Group's debt of £0.1bn. The net surplus generation was £0.5bn, after allowing for six months' amortisation of the opening Transitional Measures on Technical Provisions (TMTP). New business strain was £0.1bn. The total surplus generation includes a positive investment variance of £0.1bn reflecting market movements over 2017, in particular an increase in risk free rates and narrowing of credit spreads.

Operating variances include the impact of experience variances, changes to valuation and capital calibration assumptions, and other management actions including changes in asset mix, matching adjustment optimisation, hedging strategies, M&A activities (sale of Cofunds and Legal & General Netherlands contributed £0.1bn surplus), and update to the longevity assumptions.

The above incorporates management's estimate of the impact of recalculating the Transitional Measures for Technical Provisions (TMTP) as at 30^th June 2017 as we believe this provides the most up to date and meaningful view of our Solvency II position. In line with PRA guidance, a formal recalculation of the Group's TMTP will take place no later than 1^st January 2018.

When stated on a proforma basis, including the SCR attributable to our With-profits fund of £0.5bn and the final salary pension schemes of £0.2bn in both the Group's Own Funds and the SCR, the Group's coverage ratio was 180% (FY 2016: 165%).

reconcilation of ifrs net release from operations to solvency ii net surplus generation

The table below gives a reconciliation of the Group's IFRS Release from operations and Solvency II Operational surplus generation in H1 2017:

The table below gives a reconciliation of the Group's IFRS New business surplus to Solvency II New business strain in H1 2017:

Sensitivity analysis

The above sensitivity analysis does not reflect all of the management actions which could be taken to reduce the impacts. In practice, the Group actively manages its asset and liability positions to respond to market movements. These results all allow (on an approximate basis) for the recalculation of estimated TMTP as at 30^th June 2017 where the impact of the stress would cause this to change materially. The impacts of these stresses are not linear therefore these results should not be used to interpolate or extrapolate the impact of a smaller or larger stress. The results of these tests are indicative of the market conditions prevailing at the balance sheet date. The results would be different if performed at an alternative reporting date.

Solvency II new business contribution

Management estimates of the value of new business and the margin as at 30^th June 2017 are shown below:

1.   UK annuity business.

Key assumptions in calculating the Solvency II new business contribution are shown below:

All assumptions and methodologies that would have a material impact on the margin for these contracts are unchanged from end 2016 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 deeply and are rewarded for, and which are consistent with delivery of our strategic objectives. Risk management is embedded within the business. The Group's Principal Risks and Uncertainties summarise key matters that may impact the delivery of the Group's strategy, earnings or profitability.

ENQUIRIES

Investors:

Laura Doyle                               Head of Investor Relations                                                           020 3124 2088

Sujee Rajah                               Investor Relations Manager                                                         020 3124 2047

Media:

Graeme Wilson                          Tulchan Communications                                                             020 7353 4200

Sheebani Chothani                     Tulchan Communications                                                             020 7353 4200

Notes

A copy of this announcement can be found in "Results", under the "Financial information" section of our shareholder website at http://www.legalandgeneralgroup.com/investors/results2017.html.

A presentation to analysts and fund managers will take place at 9.30am UK time today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of the presentation which can be accessed at http://www.legalandgeneralgroup.com/investors/video.html A replay will be available on this website later today.

There will be a live, listen only, teleconference link to the presentation. Details below:

DEFINITIONS

Definitions are included in the Glossary on pages 101 to 105 of this release.

FORWARD LOOKING STATEMENTS

This announcement may contain certain forward-looking statements relating to Legal & General, its plans and its current goals and expectations relating to future financial condition, performance and results. By their nature, forward-looking statements involve uncertainty because they relate to future events and circumstances which are beyond Legal & General's control, including, among others, UK domestic and global economic and business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory and Governmental authorities, the impact of competition, the timing impact of these events and other uncertainties of future acquisition or combinations within relevant industries. As a result, Legal & General's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in these forward-looking statements and persons reading this announcement should not place reliance on forward-looking statements. These forward-looking statements are made only as at the date on which such statements are made and Legal & General Group Plc does not undertake to update forward-looking statements contained in this announcement or any other forward-looking statement it may make.

GOING CONCERN STATEMENT 

The Group's business activities, together with the factors likely to affect its future development, performance and position in the current economic climate are set out in this Interim Management Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Group Results. Principal risks and uncertainties are detailed on pages 18 to 20. In addition, the financial statements include, amongst other things, notes on the Group's objectives, policies and process for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities, and its exposures to credit and liquidity risk.

The Group manages and monitors its capital with various stresses built in in order to understand the expected impact of market downturns. These stresses do not give rise to any material uncertainties over the ability of the Group to continue as a going concern and therefore, based upon the available information, the directors consider that the Group has the plans and resources to manage its business risks successfully as it has a diverse range of business and remains financially strong.

Having reassessed the principal risks, the directors considered it appropriate to adopt the going concern basis of accounting in preparing the interim financial information.

Director's responsibility statement

We confirm to the best of our knowledge that:

i.   The consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;

ii.  The interim management report includes a fair review of the information required by DTR 4.2.7, namely an indication of important events that have occurred during the first six months of the financial year and their impact on the consolidated interim financial statements, as well as a description of the principal risks and uncertainties faced by the company and the undertakings included in the consolidation taken as a whole for the remaining six months of the financial year;  

iii.  The interim management report includes, as required by DTR 4.2.8, a fair review of material related party transactions that have taken place in the first six months of the financial year and any material changes in the related party transactions described in the last Annual Report and Accounts; and 

iv.  The directors of Legal & General Group Plc are listed in the Legal & General Group Plc Annual Report and Accounts for 31 December 2016, with the exception of Mark Gregory who resigned as Chief Financial Officer on 9 March 2017 and Richard Meddings and Rudy Markham who both resigned as non-executive directors on 25 May 2017. Stuart Jeffrey Davies joined the Board as Chief Financial Officer on 9 March 2017, Kerrigan Procter joined the Board as Chief Executive Officer, Legal & General Retirement on 9 March 2017 and Toby Strauss joined the Board as non-executive director on 1 January 2017. A list of current directors is maintained on the Legal & General Group Plc website: legalandgeneralgroup.com.

By order of the Board

Nigel Wilson                                          Stuart Jeffrey Davies

Group Chief Executive                            Group Chief Financial Officer

8 August 2017                                       8 August 2017

NOTES