H1 2023 Results: £0.95bn of operating profit and capital generation, stock of deferred profits up to £13.8bn, DPS up 5% to 5.71p and SII ratio of 230%
Resilient financial performance1
· Operating profit of £941m (H1 2022: £958m)
· Solvency II coverage ratio2 of 230%, with surplus of £9.2bn (H1 2022: 212%)
· Solvency II operational surplus generation of £947m (H1 2022: £946m)
· Profit after tax3 of £316m (H1 2022: £575m)
· Interim dividend of 5.71p, up 5% (H1 2022: 5.44p)
£947m capital generation with significant dividend headroom4
· We are on track to achieve our five-year (2020-2024) ambitions. To date:
‒ Capital generation of £5.9bn (£8.0-9.0bn by 2024)
‒ Dividends of £3.6bn (£5.6-5.9bn by 2024)
‒ Net surplus generation over dividends of £0.6bn5
· The Board’s intention is to continue to grow the dividend at 5% per annum to FY246
Stock of deferred profits up to £13.8bn as new business outpaces backbook release7
· New business deferred profits of £0.6bn
‒ LGRI premiums of £5.0bn (H1 2022: £4.4bn) generating deferred profit of £0.4bn8
‒ In H2, LGRI has already written a further £1.8bn UK and $1.0bn US PRT
“We remain on track to achieve our five-year ambitions and deliver attractive returns for our shareholders. In H1, we delivered £0.95bn of both IFRS operating profit and capital generation, together with a Solvency II ratio of 230% and a surplus of £9.2bn. The dividend is up by 5%. LGRI and LGC performed strongly, LGIM results stabilised, and Retail’s performance – while impacted by competition in some areas – was bolstered by growing annuity sales and progress in US protection. We wrote £4.9bn of UK PRT, deploying just £106m of capital, underlining the benefits of our synergistic business model. I’d like to thank my colleagues for their contribution and ongoing commitment to inclusive capitalism, serving our shareholders, customers and wider society.”
Sir Nigel Wilson, Group Chief Executive
Financial summary
| £m | H1 2023 | H1 2022 | Growth % |
| Analysis of operating profit | |||
| Legal & General Retirement Institutional (LGRI) | 471 | 395 | 19 |
| Retail | 230 | 295 | (22) |
| Legal & General Capital (LGC) | 296 | 263 | 13 |
| Legal & General Investment Management (LGIM) | 142 | 200 | (29) |
| Operating profit from divisions | 1,139 | 1,153 | (1) |
| Group debt costs | (106) | (108) | 2 |
| Group investment projects and expenses | (92) | (87) | (6) |
| Operating profit1 | 941 | 958 | (2) |
| Investment and other variances (incl. minority interests) | (617) | (261) | n/a |
| Profit before tax attributable to equity holders2 | 324 | 697 | (53) |
| Profit after tax attributable to equity holders | 316 | 575 | (45) |
| Earnings per share (p) | 5.16 | 9.52 | (46) |
| CSM3 | 12,352 | 11,546 | 7 |
| CSM (net of tax) + Book Value | 14,490 | 14,426 | – |
| CSM + Book value per share (p) | 241 | 240 | – |
| Solvency II | |||
| Operational surplus generation | 947 | 946 | – |
| New business strain4 | (195) | (121) | |
| Net surplus generation | 752 | 825 | |
| Solvency II Own Funds | 16,197 | 17,374 | |
| Solvency Capital Requirement | (7,036) | (8,193) | |
| Solvency II Surplus | 9,161 | 9,181 | |
| Coverage ratio (%) | 230 | 212 | 18 |
| Interim dividend per share (p) | 5.71 | 5.44 | 5 |
1. Operating profit is an Alternative Performance Measure and represents Adjusted operating profit as defined on page 102.
2. Profit before tax attributable to equity holders is an Alternative Performance Measure and represents Adjusted profit before tax attributable to equity holders as defined on page 103.
3. CSM (gross of tax, net of reinsurance) includes the new business CSM uplift associated with the L&G pension schemes’ partial buy-in transaction in H1. In H2 we expect to move to a full buy-out of the pension schemes.
4. This does not reflect the anticipated reduction in the Risk Margin (part of planned reforms to the Solvency regime) which is estimated to reduce H1 New business strain by £55-60m.
H1 2023 Financial performance
Income statement
Year to date operating performance is resilient with H1 2023 operating profit from divisions of £1,139m (H1 2022: £1,153m). All four of our divisions remain well-positioned to continue to execute on compelling structural market opportunities to deliver further profitable growth over the medium and long-term.
LGRI operating profit increased by 19% to £471m (H1 2022: £395m) underpinned by the growing scale of backbook earnings and the consistent investment performance of our annuity portfolio. LGRI executed higher new business volumes to address growing demand while maintaining pricing discipline, writing £4,992m of global PRT (H1 2022: £4,449m) at a Solvency II new business margin (8.0%)[9] in line with our long-term average. H2 has started well, with £1.8bn of UK PRT and $1.0bn of US PRT completed to date.
Retail delivered operating profit of £230m (H1 2022: £295m). Whilst insurance operating profit is up 4% (H1 2023: £243m, H1 2022: £234m), driven by resilient ongoing profit releases in the UK and US, total operating profit is down given the lower contribution from Fintech, as valuation uplifts from H1 2022 did not repeat. The Retail Retirement business again delivered good new business volumes, and we continue to focus on disciplined pricing to ensure attractive shareholder returns.
LGC operating profit increased by 13% to £296m (H1 2022: £263m) driven by our alternative asset portfolio, where operating profit increased to £230m (H1 2022: £202m). Our Alternative Finance business, led by Pemberton, continues to perform strongly, and in our Specialist Commercial Real Estate portfolio, our targeted investments in infrastructure and science & technology-focussed assets proved more resilient than the general commercial property market. Our diversified, multi-tenure housing portfolio also remained resilient with Cala, our largest housing business, continuing to perform well in the face of a challenging market.
LGIM delivered operating profit of £142m (H1 2022: £200m) primarily reflecting the impact of rising interest rates on assets under management, which decreased by £132bn to £1,158bn (H1 2022: £1,290bn). Despite significant inflationary impacts, we have taken action to keep absolute costs flat on an FX-adjusted basis.
Profit before tax attributable to equity holders[10] was £324m (H1 2022: £697m), reflecting investment variance of £(617)m (H1 2022: £(261)m). H1 2023 investment variance was driven by the unrealised mark to market impact of higher rates on our portfolio, the cost relating to our announced Modular Homes closure and the write-down of our investment in Onto.
Balance sheet and asset portfolio
Group’s Solvency II operational surplus generation (OSG) was level at £947m (H1 2022: £946m) despite rising interest rates which reduced SCR releases. Net surplus generation (NSG) was £752m (H1 2022: £825m). We operate a capital light PRT business: in H1 2023, PRT capital strain was just over 2%. New business strain does not include risk margin reforms, which have an estimated H1 benefit of £55-60m for PRT and Individual annuities combined. We have scope to write up to £11bn of UK PRT volumes and for the UK annuity portfolio to be self-sustaining again in 2023, as it has been for the last three years.
The Group reported a Solvency II coverage ratio[11] of 230% at H1 2023 (FY 2022: 236%, H1 2022: 212%), slightly ahead of our recent disclosure[12] (c225%) which reflected some degree of prudence as we continue to optimise our asset liability management.
Our IFRS return on equity of 13.0% (H1 2022: 22.8%) reflects the unrealised mark to market impact of investment and other variances on the total result.[13] Looking at the result before investment variance, return on equity would be 37.1% (H1 2022: 31.4%). We expect investment variance to average to zero over the longer term.[14]
Our stock of deferred profit increased 3% to £13.8bn (H1 2022: £13.4bn), with CSM up 7% to £12.4bn, reflecting contributions from our growing annuity businesses and routine longevity updates in H2 2022, partially offset by the Risk Adjustment (£1.5bn) reducing from H1 2022 (£1.9bn) as a result of rising interest rates.[15]
Our diversified, actively managed annuity portfolio has continued to perform resiliently. In H1 2023 our annuity portfolio experienced no downgrades to sub-investment grade and more upgrades than downgrades. There were no material property or credit write downs. 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 Strategy
Legal & General has established expertise in asset origination (LGC) and asset management (LGIM), and in the provision of retirement and protection solutions to corporates and individuals (LGRI and Retail). We operate at scale and are strongly positioned to capitalise on significant growth opportunities across our chosen markets through our four divisions:
| Division | Provision | Description |
| LGRI | Retirement Solutions | A leading international manager of institutional Pension Risk Transfer (PRT) business |
| Retail | Retirement & Protection Solutions | A leading provider of UK retail retirement and protection solutions and US term life insurance[16] |
| LGC | Asset Origination | An alternative asset origination platform generating attractive shareholder returns |
| LGIM | Asset Management | A global £1.2tn asset manager with deep pensions expertise |
A powerful business model
We have a unique and highly synergistic business model, which continues to drive a strong return on equity. Legal & General provides powerful asset origination and management capabilities directly to clients. These capabilities also underpin our leading retirement and protection solutions:
· LGRI is a market leader in UK PRT and a top ten player in the US PRT market, with annuity assets of £55.5bn.[17] It provides long-term captive AUM to LGIM, and the annuity portfolio is continually enhanced through the supply of alternative assets originated by LGC.
· Retail is a leading provider of UK retail retirement and protection solutions, and US term life insurance. The UK retail retirement product offerings include workplace savings, annuities, income drawdown and lifetime mortgages (LTM). Workplace savings benefits from LGIM’s existing DC relationships and distribution team to win new schemes and the retail annuity business provides captive AUM to LGIM Retail is also an internal centre of excellence in technology, and manages a portfolio of complementary Fintech investments.
· LGC invests across four main asset classes (Specialist Commercial Real Estate, Clean Energy, Housing and Alternative Finance) to generate attractive risk-adjusted shareholder returns and to create alternative assets to (i) back our annuity portfolios in LGRI and Retail and (ii) meet the growing third-party demand for alternative assets. LGC is increasingly attracting third-party capital either directly through existing investments, or through collaboration with LGIM.
· LGIM is a leading global asset manager, ranking 11th in the world[18] with £1.2tn of AUM of which £457bn, or 39%, are international assets[19]. LGIM is a leading provider of UK and US Defined Benefit (DB) de-risking solutions. It is uniquely positioned to support DB clients across the full range of pension ‘Endgame’ destinations, including PRT with LGRI. 81% of LGRI’s PRT transactions over the past three years were from existing LGIM clients.[20] LGIM is also the market leader in UK Defined Contribution (DC) pension scheme clients with DC AUM of £146bn – a market with significant growth potential, with total UK DC assets expected to surpass £1.2tn by 2031.[21]
The synergies within and across our businesses drive profits and fuel future growth.
The integrated nature of our business model means we have relationships with clients and customers that can and do last for decades. A corporate client in LGIM has historically become a PRT client after 14 years, however this is now expected to accelerate due to improved funding levels. We are working with LGIM clients to reconfigure their portfolios to lock in any funding gains that have been made, by better matching to a typical insurance pricing portfolio and to position the assets to be more easily transferred as part of a buy-in or buyout transaction. Once moved to PRT, LGRI will then typically have a relationship with that client for another 30 to 40 years. Similarly, Retail Retirement and LGIM may have a 30-40 year relationship with a customer during the DC accumulation phase, and then extend that relationship for another 15-30 years during the decumulation phase across a suite of decumulation products including individual annuities, lifetime mortgages and drawdowns.
The Group continues to build out, in a measured fashion, its international franchise. We have made excellent progress in the US over the last decade and will continue to grow all four divisions in that market. LGIM continues to make good progress against its international expansion plans in the US, Europe and Asia. Kerrigan Procter continues to coordinate the Group’s expansion plans in Asia building on the $167bn of regional assets already under management (FY 2022: $150bn).
A long-term commitment to Sustainability and Inclusive Capitalism
Our purpose is to improve the lives of our customers, create value for our shareholders and to build a better society for our customers, our shareholders, and our communities. This inspires us to invest our assets in an economically, environmentally and socially useful way to benefit society for the long-term – what we call Inclusive Capitalism. We believe investing in fundamental pillars of society will enable strong shareholder returns and improve the lives of our customers.
Our philosophy underpins our approach to sustainability.[22] We think about sustainability in terms of:
1. How we invest proprietary assets.[23] Our ambition is to reduce our group investment portfolio economic carbon intensity by half by 2030 and to net zero carbon by 2050. In 2022, our group investment portfolio economic carbon intensity fell by 5% versus 2021, through a combination of market movements, partially offset by a muted emissions increase as business activity increased. While the reduction of 23% from 2019 is ahead of our 2022 target, we may still see further volatility from future global events – as experienced through the pandemic and the ongoing conflict in Ukraine – and therefore remain focused on delivery of our mid-to-long-term decarbonisation targets. We continue to make environmentally and socially useful investments. As at H1 2023, we have invested £1.4bn in clean energy and £8.7bn in social infrastructure. For more information, please see our latest Climate Report, compliant with recommendations by the Task Force on Climate-related Financial Disclosures (TCFD), and our latest Social Impact Report, which describes our activity in investing for positive social, economic and health outcomes.[24]
2. How we influence as one of the world’s largest asset managers with £1.2 trillion AUM. We have £331.6bn AUM in ESG strategies, and in H1 2023, our investment stewardship team engaged with around 630 companies, holding them to account on the issues that matter most to our clients.[25],[26] In June 2023, we reported on the latest cycle of our Climate Impact Pledge engagement programme, which we have expanded to include a quantitative assessment of over 5,000 companies across 20 climate-critical sectors, alongside in-depth engagement with around 100 ‘dial mover’ companies. LGIM is proud to have received a 5 star ranking from the UN Principles for Responsible Investment (UN PRI) for investment stewardship and policy, and to have scored over 75% in each section of the latest UN PRI report.[27] In addition to being among the highest rated managers for engagement by FinanceMap, LGIM has also been highlighted by MajorityAction for its approach to holding companies to account on climate change.
3. How our businesses operate. We are committed to supporting our customers, employees, suppliers, shareholders and society at large. In the current economic environment, we recognise that support is more critical now than ever. For information on how we are supporting our stakeholders, please see our Social Impact report.14 We have committed to reducing the carbon emission intensity of our operating businesses. Our ambition is to operate our offices and business travel with net zero emissions from 2030, and for all our new homes to be net zero operational carbon from 2030. ESG criteria are included in executives’ objectives and remuneration schemes.
CEO succession plans
In June, we were pleased to announce António Simões as the Group’s next Chief Executive Officer, subject to regulatory approval.
António will join from Banco Santander where he has been Regional Head of Europe since September 2020. In this role, he leads Santander’s businesses in the UK, Spain, Portugal and Poland, working across retail and commercial banking, corporate and investment banking, wealth management and insurance. Prior to joining Santander, António spent 13 years at HSBC, including as CEO of UK and Europe, and latterly CEO of Global Private Banking, based in London and Hong Kong. He is a former McKinsey & Company partner.
António’s appointment follows a rigorous, global, selection process managed by Sir John Kingman, Group Chair. He will succeed Sir Nigel Wilson as Group CEO. Sir Nigel has been Group CEO of Legal & General since 2012, and in January announced his intention to retire from executive life.
Since Sir Nigel joined Legal & General, the Group has delivered a consistently strong financial performance with a total shareholder return of over 600% driven by significant growth in dividends, earnings per share and ROE. During his time as Chief Executive, Sir Nigel has executed numerous strategic initiatives to grow and re-focus the business, consistently exceeding financial and operational targets while also ensuring Legal & General has delivered Inclusive Capitalism with positive outcomes for shareholders, customers and the broader economy.
António will take up his new post formally on 1 January 2024. Sir Nigel will remain as Chief Executive in the meantime, continuing to focus on delivering the strategy of the Group. Sir Nigel will work closely with António to ensure a comprehensive handover and a smooth transition. António will join the Board of Legal & General Group plc on appointment, at which point Sir Nigel will step down from the Board.
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 – and even benefit from – the prevailing market environment. We are confident we can continue to deliver profitable growth as we execute on our strategy.
We set out five-year ambitions at our Capital Markets event in November 2020. Cumulatively, over the period 2020-2024, our financial ambitions[28] are for:
· Capital generation (of £8.0bn – £9.0bn) significantly to exceed dividends (of £5.6bn – £5.9bn)[29]
· Earnings per share to grow faster than dividends, with the dividend growing at 5% per annum to FY 2024[30]
· Net capital surplus generation (i.e., including new business strain) to exceed dividends
We made further progress against these ambitions in H1 2023 and remain confident in achieving them. In H1 2023, we achieved £947m in capital generation (H1 2022: £946m), and from the start of the ambition period to H1 2023, we have now achieved £5.9bn of cumulative capital generation while declaring dividends of £3.6bn.
We remain highly confident in our strategy and 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 surplus regulatory capital of £9.2bn over a capital requirement of £7.0bn.
Business segment outlook
Legal & General Institutional Retirement (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, Ireland and the Netherlands, which together have more than £6 trillion of pension liabilities.
We write direct business in both the UK and US and are top-tier providers in both markets. We are supported by LGIM’s long-standing client relationships, investment sourcing and asset management capabilities as well as LGC’s asset origination capabilities and Retail’s lifetime mortgage origination.
The UK is our primary market and is the most mature PRT market globally with £1.4 trillion of UK DB pension liabilities, of which an estimated c15% has been transferred to insurance companies to date.[31] The addressable market therefore remains significant and demand for PRT is growing as rising interest rates and widening credit spreads reduce pension deficits and allow more funds to consider de-risking options.
Our stated ambition is to write circa £8-10bn of UK PRT per annum and we are confident of achieving this. We have demonstrated that this level of new business is self-sustaining, i.e. the growing amount of capital generated by our in-force UK annuity book more than offsets both the capital investment required to fund new business and the portfolio’s contribution to our progressive Group dividend.
The UK annuity portfolio achieved self-sustainability in 2020, 2021 and 2022. Over the period from the beginning of 2020 to H1 2023, Group net surplus generation has exceeded dividends by a total of £0.6bn. For 2023 as a whole, we currently have capacity to write up to £11bn of UK PRT and still achieve self-sustainability for the UK annuity portfolio.
The US represents another significant market opportunity, with $3.2 trillion of DB liabilities, of which an estimated c11% have transacted to date.[32] Since our market entry in 2015, our US business has completed 96 transactions and written $8.6bn of business.
Canada is a market that has potential and where we have seen a growing acceleration of pension schemes looking to de-risk. The market is estimated to have CAD $1.8tn of DB liabilities with only c10% of $0.5 trillion private sector DB liabilities having transacted to date.[33] Since our market entry in 2019, we have written CAD $1.2bn of liabilities through our reinsurance entity, L&G Re.
In the Netherlands, pension reform legislation could result in significant PRT business coming to market over the next 3-4 years. With pension liabilities of over €1 trillion[34], we continue to actively monitor this market and have announced plans to enter into a long-term strategic relationship with Lifetri in order to participate, should attractive opportunities arise.
Our ambition is to write at least $10bn of international PRT over the five years from 2020-2024. We have written $5.7bn of International PRT from 2020 through H1 2023, and we have written $1.0bn so far in H2. There remains significant opportunity in these markets and we are well-positioned to continue to execute where the margins justify.