Legal & General Group Plc (LGEN) today announced their Half Year results for 2019.
Financial highlights1
· 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 dividend2 of 4.93p per share (H1 2018: 4.60p)
· Profit after tax3 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 ratio4 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.
