Legal & General Grp - Full Year Results 2018

Financial highlights2

·    OPERATING PROFIT1 OF £1,902M, UP 10% (2017: £1,723M)

·    EARNINGS PER SHARE3 OF 24.74P, UP 7% (2017: 23.10P) - impacted by reductions in asset markets

·    RETURN ON EQUITY AT 22.7% (2017: 25.6%)

·    FULL YEAR DIVIDEND UP 7% TO 16.42P PER SHARE (2017: 15.35P)

·    PROFIT AFTER TAX4 DOWN 3% TO £1,827M (2017: £1,891M) - prior year one-off US tax benefit of £246m

·    SOLVENCY II COVERAGE RATIO5 OF 188% (2017: 189%)

·    SOLVENCY II OPERATIONAL SURPLUS GENERATION UP BY 14% TO £1.4BN (2017: £1.3BN)

Business highlights

Investing & Annuities

·    LGR PENSION RISK TRANSFER SALES6 OF £9.1BN (2017: £3.9BN)

·    LGR INDIVIDUAL ANNUITY SALES UP 18% TO £795M (2017: £671M)

·    LGR LIFETIME MORTGAGE ADVANCES UP 19% TO £1.2BN (2017: £1.0BN)

·    GROUP-WIDE DIRECT INVESTMENT UP 34% AT £19.2BN (2017: £14.4BN)

Investment Management

·    LGIM AUM UP 3% AT £1,015BN (2017: £983BN)

·    LGIM EXTERNAL NET FLOWS OF £42.6BN (2017: £43.5BN)

Insurance

·    LGI TOTAL GWP UP 3% TO £2,615M7 (2017: £2,531M8), INCLUDING US GWP OF $1,299M (2017: $1,254M)

·    GENERAL INSURANCE GWP UP 11% TO £410M (2017: £369M)

 

"Legal & General's consistent strategy, market leading businesses, balance sheet strength and high quality people have enabled us to deliver eight years of compound annual profit growth of over ten percent. 2018 saw political uncertainty, asset market declines and slowing economic growth, but we are resilient and performed strongly. We became the UK's first £1 trillion investment manager, executed a record £9 billion of pension risk transfer deals and invested billions in the UK's future infrastructure and cities. Abroad, we grew US protection new business annual premiums by 12% and increased international assets by 13% to £258bn.

Excluding our £433m positive mortality release, operating profit was up 10% to £1.9bn and we had EPS growth of 7%, DPS growth of 7%, book value growth of 13% and an RoE of 23%. We are a globally trusted brand. Our strategy positions us well despite the broader environment, our current trading is strong and we expect this momentum to continue in 2019."

Nigel Wilson, Group Chief Executive

Financial summary

£m

 

2018

2017

Growth %

 

 

 

 

 

Analysis of operating profit

 

 

 

 

Legal & General Retirement (LGR) excl. mortality reserve release1

 

1,115

915

22

-  LGR Institutional (LGRI)

 

832

716

16

-  LGR Retail (LGRR)

 

283

199

42

Legal & General Investment Management (LGIM)

 

407

400

2

Legal & General Capital (LGC)

 

322

272

18

Legal & General Insurance (LGI)2

 

308

303

2

General Insurance

 

0

37

(100)

Continuing operating profit from divisions1,7

 

2,152

1,927

12

Mature Savings3

 

79

103

(23)

Legal & General Netherlands4

 

-

4

n/a

 

 

 

 

 

Operating profit from divisions1

 

2,231

2,034

10

Group debt costs

 

(203)

(191)

(6)

Group investment projects and expenses

 

(126)

(120)

(5)

 

 

 

 

 

Operating profit1

 

1,902

1,723

10

Legal & General Retirement (LGR) mortality reserve release

 

433

332

30

Operating profit incl. mortality reserve release

 

2,335

2,055

14

Investment and other variances (incl. minority interests)5

 

(207)

35

n/a

 

 

 

 

 

 

 

 

 

 

Profit before tax attributable to equity holders

 

2,128

2,090

2

Profit after tax attributable to equity holders

 

1,827

1,891

(3)

Of which:

-       Mortality reserve releases (post-tax)

 

359

274

n/a

-       2017 one-off US tax

 

-

246

n/a

Profit after tax6 excl. mortality reserve release and prior year one-off US tax

 

1,468

1,371

7  

 

 

 

 

 

 

 

 

 

 

Earnings per share6 (p)

 

24.74

23.10

7

Of which:

 

 

 

 

-       Mortality reserve releases

 

6.05

4.62

n/a

-       2017 one-off US tax

 

-

4.15

n/a

   Reported earnings per share (p)

 

30.79

31.87

(4)

Return on equity (%)

 

22.7

25.6

n/a

Book value per share (p)

 

143

126

13

Full year dividend per share (p)

 

16.42

15.35

7

 

 

 

 

 

Net release from continuing operations7

 

1,396

1,352

3

Net release from discontinued operations

 

44

102

(57)

 

 

 

 

 

 

018 financial performance

Income statement

Operating profit8 increased 10% to £1,902m (2017: £1,723m).

LGR delivered a 22% increase in operating profit8 to £1,115m (2017: £915m), driven by significant UK PRT volumes in H2, our increasing market share in individual annuities, and consistent profits emerging from the backbook, including heavier than expected mortality experience in 2018 and routine assumption updates. In H2 2018 we also reviewed our future mortality improvement assumptions and adopted an adjusted version of the CMI 2016 mortality tables for LGR's annuity book, resulting in a reserve release of £433m. Including this mortality reserve release and the prior year equivalent, growth in operating profit was 24%.

LGIM operating profit increased by 2% to £407m (2017: £400m). Management fee revenues grew to £813m (2017: £780m) and AUM reached £1,015bn (2017: £983bn). Asset valuations and fee revenues were impacted by market declines in the first and fourth quarters of the year offset in part by external net inflows of £42.6bn (2017: £43.5bn). LGIM has continued the heightened investment in the business to ensure it remains at the forefront of the structural changes in the investment and savings industry, which is reflected in a cost income ratio of 52%.

LGC operating profit increased by 18% to £322m (2017: £272m) driven by growth in the £2.4bn (2017: £1.5bn) direct investment portfolio which contributed £188m (2017: £124m). This included an additional contribution from CALA Homes following the acquisition of the remaining 52.1% of the business in March 2018, as well as consistent performance from the existing portfolio.

LGI operating profit increased by 2% to £308m (2017: £303m9). The turnaround in UK Group Protection performance and model refinements in UK Retail Protection were partially offset by market wide adverse US mortality experience. This compares to positive US mortality experience in the prior year. New business premiums have grown by 14% to £343m.

General Insurance operating profit decreased to £nil (2017: £37m), as a result of adverse claims experience caused by the February/March freeze and a subsidence surge due to prolonged dry weather over the summer, in line with the wider market. Excluding these impacts, operating profit was £26m and the combined operating ratio was 97%.

On 6 December 2017 we announced the sale of our Mature Savings business to Swiss Re for £650m. In 2018, we recognised £79m operating profit from the business resulting from a combination of the unwind of the expected underlying profits and the release of a one-off £33m provision, which is no longer required following the transaction.

Outlook

The structural drivers, on which the Group's strategy is based, are largely unaffected by on-going political and economic uncertainty. We remain confident Legal & General will continue its momentum into 2019. Between 2011 and 2015 we achieved an EPS CAGR of 10% per annum, and are on track to deliver a similar performance out to 2020. Since 2015 we have delivered an EPS CAGR of 11%.

Legal & General is well placed to grow further and take advantage of organic growth opportunities and bolt-on M&A. To support these plans, we will continue to invest in technology in a measured way across the Group.

The Group's balance sheet remains strong with £6.9bn in surplus regulatory capital and has significant buffers to absorb a market downturn. For example, even a repeat of the 2001/2002 credit event, which experienced more defaults than the 2008/2009 financial crisis, would result in a robust solvency ratio that continues to support our strategy, before any management actions.17While no business model can be fully immune to market volatility, our operating model is resilient as well as being underpinned by robust risk management practices.

Full year dividend up 7%

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 our dividend policy.

In line with our policy, the Board has maintained its view of the medium-term trajectory of dividend growth, taking into account sustainability across a wide range of economic scenarios and the Group's anticipated financial performance. Accordingly, the Board has recommended a final dividend of 11.82p (2017: 11.05p) giving a full year dividend of 16.42p (2017: 15.35p), 7% higher than 2017.