Legal & General Group Plc (LON:LGEN) has announced its full year 2023 results.
António Simões, CEO
“Everything I have seen since joining the business in January has confirmed what attracted me to Legal & General. We have an authentic sense of purpose and stand out for our market-leading businesses, performance track record and strong balance sheet, delivered by talented colleagues.
Our 2023 performance reflects these strengths. We are on course to achieve our five-year targets, and demonstrated resilience in challenging markets to achieve record new business volumes in pension risk transfer, UK annuities and US protection, increasing our store of future profit. Our international assets under management and alternative assets portfolio continue to grow, as does our position in the UK defined contribution pensions market.
We must be as ambitious for Legal & General’s future as we are proud of our history. This is the right moment to take a fresh perspective, build on our track record and set out a vision for profitable and sustainable growth. I look forward to outlining our strategy and plans at our Capital Markets Event on 12 June.”
· Operating profit of £1,667m (2022: £1,663m)
· Profit after tax2 of £457m (2022: £783m)
· Solvency II capital generation of £1.8bn (2022: £1.8bn)
· Solvency II coverage ratio3 of 224%, with surplus of £9.2bn (2022: 236%, £9.9bn)
· Dividend per share of 20.34p, up 5% (2022: 19.37p)
Growth in our store of future profit: up 9% to £14.7bn4
· Record volumes across our insurance businesses:
‒ £13.7bn of institutional annuities (£10.5bn retained premium5)
‒ £1.4bn of individual annuities
‒ $175m of US protection new business premium
· New business CSM contributed £1.2bn (2022: £0.9bn)
· CSM has grown 9% to £13.0bn (2022: £11.9bn)
Set to achieve our five-year (2020-2024) ambitions
· Cumulative Solvency II capital generation of £6.8bn (£8-9bn by 2024)
· Cumulative dividends declared of £4.5bn (£5.6-5.9bn by 2024)
· Cumulative net surplus generation over dividends of £0.8bn
· The Board’s intention is to grow the dividend at 5% for the year FY246, as previously communicated
1. The Group uses a number of Alternative Performance Measures (including adjusted operating profit) to enhance understanding of the Group’s performance. These are defined in the glossary, on pages 83 to 83 of this report. IFRS 17 was introduced on 1st January 2023, comparatives have been restated accordingly.
2. Profit after tax attributable to equity holders.
3. Solvency II coverage ratio before the payment of 2023 final dividend.
4. Store of future profit refers to the gross of tax combination of established Contractual Service Margin “CSM” and Risk Adjustment “RA” (net of reinsurance) under IFRS 17.
5. Net premium after deducting for funded reinsurance relating to 2023 PRT transactions.
6. Absent market shocks / events outside of our control.
2023 Financial performance
Income statement
2023 operating performance was resilient, with operating profit from divisions of £2,078m (2022: £2,071m). Our business remains well-positioned to execute on compelling structural market opportunities to deliver further profitable growth over the medium and long-term.
LGRI operating profit increased by 10% to £886m (2022: £807m) underpinned by the growing scale of back-book earnings and the consistent investment performance of our annuity portfolio. LGRI executed record new business volumes, addressing growing demand while maintaining pricing discipline, writing £13,719m of global PRT (2022: £9,541m) at a Solvency II new business margin of 7.4%[1] in line with our long-term expectation. This has added c£1.0bn to our store of future profit in 2023.
Retail operating profit decreased by 2% to 408m (2022: £415m). Whilst insurance operating profit was up 22% (2023: £436m, 2022: £357m), driven by ongoing profit releases in the UK and US, total operating profit was down given the lower contribution from the Fintech businesses, as valuation uplifts from 2022 did not repeat.
LGC operating profit was flat against prior year earnings at £510m (2022: £509m), reflecting a good performance in a challenging macro-economic environment for alternative assets. In 2023, we grew our third-party managed capital by 9% to £18.1bn (2022: £16.6bn). We remain on track to meet our ambition of £25-30bn by 2025.
LGIM delivered operating profit of £274m (2022: £340m), primarily reflecting the impact of higher interest rates on the value of assets under management: average assets under management were 12% lower year-on-year. Despite significant inflationary impacts, we have taken action to keep absolute costs flat.
Profit before tax attributable to equity holders, excluding longevity and internal pension scheme accounting, was £561m (2022: £1,035m), reflecting investment and other variances of £(1,106)m (2022: £(628)m). Investment variance was driven by the unrealised mark-to-market impact of higher rates on asset valuations, the cost relating to our announced Modular Homes closure and the write-down of our investment in Onto.
Balance sheet and asset portfolio
Solvency II operational surplus generation (OSG) was level at £1,821m (2022: £1,805m). Net surplus generation (NSG) was £1,383m (2022: £1,453m) reflecting the impact of higher volumes of PRT business with strain levels in line with our long-term average. The UK annuity portfolio was self-sustaining again for the 4th year in a row, and we continue to have optionality to further enhance profitability through back-book asset optimisation.
Solvency II coverage ratio[2] is strong at 224% (2022: 236%).
Our IFRS return on equity[3] of 9.7% (2022: 15.6%) reflects the impact of investment and other variances on the total result. Looking at the result before these variances, return on equity would be 27.1%[4] (2022: 26.9%). We expect investment variance to average to zero over the longer term.
Our store of future profit increased 9% to £14.7bn (2022: £13.5bn), with CSM up 9% to £13.0bn (2022: £11.9bn), reflecting contributions from our growing annuity businesses and the routine longevity review in H2, and by the Risk Adjustment (£1.7bn) up 11% from 2022 (£1.5bn).
Our diversified, actively managed annuity portfolio has continued to perform resiliently with no defaults. The annuity portfolio’s direct investments have received 100% of scheduled cash-flows year to date, reflecting the high quality of our counterparty exposure.
Group Outlook
Confident in achieving our ambitions; well-positioned to deliver long-term profitable growth
Our strategy has delivered strong compounding returns for our shareholders over time. It has demonstrated resilience and positions us well to navigate the prevailing market environment, and to deliver on our current five-year ambitions.
Cumulatively, over the period 2020-2024, we have an ambition to generate capital of £8-9bn, with net capital surplus generation (i.e., including new business strain) to exceed dividends of £5.6-5.9bn.[5]
We made further progress against these ambitions in 2023 and are set to achieve them in 2024. From the start of the ambition period to 2023, we have achieved £6.8bn of cumulative capital generation while declaring dividends of £4.5bn. Even with no growth in capital generation in 2024, the cumulative capital generation would still be comfortably within our stated ambition of £8-9bn. We have generated cumulative net surplus generation over dividends of £0.8bn from 2020 to date.
We remain confident in our ability to deliver resilient, organic growth, supported by our strong competitive positioning in attractive and growing markets. Our confidence in our dividend paying capacity is underpinned by the Group’s strong earnings and strong balance sheet, which has Solvency II regulatory capital of £16.6bn: a surplus of £9.2bn in excess of a capital requirement of £7.4bn.
Business segment outlook
Legal & General Retirement Institutional (LGRI)
LGRI participates actively in the global pension risk transfer (PRT) market, focusing on corporate defined benefit (DB) pension plans in the UK, the US, Canada and the Netherlands. Together, these markets have more than £6 trillion of pension liabilities of which c10% have transacted to date.[6] The addressable market therefore remains significant.
Our stated ambition for UK PRT is to write circa £8-10bn per annum under typical market volumes. With up to £355 billion of UK PRT demand over the next five years anticipated and an increase in £1bn+ size individual transactions coming to market [7], we are expecting a period of heightened market volumes. We believe we are well positioned to address this need and have appetite to write higher volumes where commercial conditions support. We will continue to be proactive in managing the capital we deploy on this business, including use of reinsurance, to generate strong margins over time.
We are also well-positioned to execute internationally, having written over $7.5bn of PRT in the US and Canada between 2020 and 2023. In 2023, we announced our strategic relationship with Lifetri which looks to capitalise on proposed pension reforms in the Netherlands.
Legal & General Retail (Retail)
Our Workplace Savings business administers one of the largest and fastest-growing UK Master Trusts, which now has £25.4bn of AUM, and was the first commercial Master Trust to surpass £20bn of assets under management. It is well positioned to benefit from the trend of consolidation in the market as well as from contributions from existing schemes. Our focus remains on improving efficiency and scalability as the business continues to grow.
We expect demand for retail annuities to remain strong, providing substantial long-term profits to the Group. In protection, we expect our US business to continue to build on the technological and distribution advantages that have delivered record sales in 2023, and in the UK, we see opportunities to further grow our distribution reach and profitability.
Legal & General Capital (LGC)
In LGC, we continue to focus on delivering financial performance through responsible and impactful investing whilst increasing our international diversification. Our unique asset origination capabilities continue to be a key differentiator for L&G in PRT as we manufacture bespoke investments, tailored to create attractive long-term returns for the annuity portfolio.
We continue to benefit from our reputation and unique partnerships to access opportunities across key sectors including Housing, Specialist Commercial Real Estate, Clean Energy, General Partners Investing and Venture Capital Platforms. This year, we are looking to invest alongside an increasing number of third-party capital partners to create long-term income streams, underpinned by societal demand. LGC will further scale its impact, whilst securing additional revenue for the Group as a result of third-party management and advisory fees.
Legal & General Investment Management (LGIM)
LGIM competes in the global asset management market and invests both on behalf of L&G and for third party clients; the latter contributes around 80% of global revenues. Asset management is a long-term business, and we remain confident in our strategy which positions LGIM for sustainable future growth, supported by industry tailwinds.
Our medium-term ambition is underpinned by the three strategic pillars, to modernise, diversify and internationalise:
· Modernise: We are evolving the business, investing in our people, platform and data capabilities to improve operating effectiveness and deliver scale benefits. This includes transformation of our operating model, using State Street/Charles River to build a global investment and middle office platform.
· Diversify: We are building on our core capabilities to improve business mix by selectively adding to our investment offering, with a focus on higher-margin areas such as private markets, active fixed income and wholesale distribution channels. We continue to focus on sustainable investing.
· Internationalise: LGIM aims to be an innovator in regions and countries where our strengths align to client needs and continues to expand globally. Since 2018, LGIM’s International AUM has grown by 81% to £465.4bn, representing 40% of AUM.
Our approach to capital allocation
The Board believes it has considerable opportunities available to deliver attractive returns to shareholders by retaining and investing capital within the Group.
The Board will at the same time continually assess these investment opportunities against the relative attractiveness of returning capital to shareholders either through a buyback or a programme of buybacks.
If, at any point, the Board believes that capital would be best deployed in this way, or if the Board believed it had surplus capital, it would not hesitate to return capital to shareholders. Any incremental capital investment could also, over time, increase the likelihood of these returns to shareholders.
We will provide further detail on our approach to capital allocation and distribution at the Capital Markets Event on the 12 June, 2024.
Dividend
Legal and General Group’s dividend policy states: “We are a long-term business and set our dividend annually, according to agreed principles. The Board’s intention for the future is to maintain its progressive dividend policy, reflecting the Group’s expected medium-term underlying business growth, including measurement of capital generation and adjusted operating profit.”
The Board has recommended a final dividend of 14.63p, giving a full year dividend of 20.34p, up 5% from the prior year (19.37p). The Board’s intention is to grow the dividend at 5% until FY24.
Notes
A copy of this announcement can be found in “Results, Reports and Presentations”, under the “Investors” section of our shareholder website at https://group.legalandgeneral.com/en/investors/results-reports-and-presentations.
A presentation to analysts and investors will take place at 10:00am UK time today at One Coleman Street, London, EC2R 5AA. There will also be a live webcast of the presentation that can be accessed at https://group.legalandgeneral.com/en/investors.
A replay of the presentation will be made available on this website by 7 March 2024.
| Financial Calendar | Date |
| Ex-dividend date (2023 final dividend) | 25 April 2024 |
| Record date | 26 April 2024 |
| Annual General Meeting | 23 May 2024 |
| Dividend payment date | 6 June 2024 |
| 2024 interim results announcement | 7 August 2024 |
| Ex-dividend date (2024 interim dividend) | 22 August 2024 |
| Record date | 23 August 2024 |
| Dividend payment date | 27 September 2024 |
[1] Solvency II margin on UK PRT business only.
[2] Solvency II coverage ratio incorporates the impact of recalculating the Transitional Measures for Technical Provisions (TMTP) as at 31 December 2023.
[3] Calculated using profit for the year and average equity attributable to the owners of the parent of £4,699m (2022: £5,014m).
[4] Calculated using the annualised UK corporation tax rate.
[5] Capital generation is Solvency II operational surplus generation. Dividends on a declared basis and originally on the basis of a flat final 2020 dividend, and 3-6% annual growth thereafter. Note: dividends have grown at 5% since HY21 and the Board stated publicly in November 2022 its aim to “continue to grow the dividend at 5% per annum to FY 2024”: ifrs17-rns-final.pdf (legalandgeneral.com). Dividend decisions are subject to final Board approval. Note: we previously also had an ambition to generate cumulatively £8-9bn cash over the period. However, under IFRS 17 it is not possible to produce ‘Net release from operations’ on which our cash generation metric was based. We therefore chose to retire the cash generation ambition from FY 2022.
[6] PPF 7800 Index at 31 December 2023, LIMRA Q3 2023 retirement market data, Statistics Canada, Mercer Pension Health Pulse 2022, WTW Group Annuity Market Pulse – 2022 Annual Review, De Nederlandsche Bank (DNB) as at Q3 2023 and L&G estimates.
[7] LCP report: Insurance enters a new phase: a skyrocketing market, October 2022.
