Legal & General share price: Group posts rise in full-year profits

on Mar 8, 2017

Legal & General (LON:LGEN) has updated investors on its full-year performance this morning.

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**Highlights from the company statement:**
Nigel Wilson, Group Chief Executive, said:
“Our long term approach to strategy and investment coupled with outstanding execution has again delivered terrific financial performance in 2016. Profit before tax up 17% to £1.6 billion, net release from operations up 12% to £1.4 billion, EPS up 19% at 22.2p and a return on equity of nearly 20%.
We believe the UK remains a great place for us to help fill the huge funding gaps and under-provision of key financial products. We are playing our part to regenerate the UK’s cities, delivering economic growth and jobs, capitalise on its world-leading universities and improve commercialisation of its scientific discoveries. Additionally, we are accelerating the evolution of our US businesses.

We look forward to the future with confidence as our core markets are growing, our market share is increasing, our balance sheet is strong and we have positive cash and earnings momentum. Through a combination of selective hiring and internal promotions we have significantly strengthened our management team and technology capability”.
Sir John Kingman, Chairman, said:
“Legal & General has a strong management team and formidable further potential. Against that backdrop, the Board has considered the best 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 an increase in the full year 2016 dividend of 7%”.

Net release from operations increased 12% to £1,411m (2015: £1,256m)
The Group delivered £1,411m net release from operations comprising £1,256m (2015: £1,217m) release from operations and £155m (2015: £39m) new business surplus. The increase in release from operations was consistent with the guidance we issued in August 2016. The £116m year-on-year increase in new business surplus was primarily a result of significantly higher new business volumes in LGR, with new annuity sales up 155% at £7.0bn.
Adjusted operating profit increased 11% to £1,628m (2015: £1,463m)
The Group achieved double digit percentage growth in adjusted operating profit for the third consecutive year, demonstrating the successful execution of our strategy.
LGR achieved record operating profits of £811m driven by strong performance from our front and back books, as well as benefitting from higher levels of longevity reinsurance on new business. Longevity experience in the year was once again positive compared to our assumptions. Despite this outcome, we have not materially adjusted our forward-looking longevity reserves.
LGIM operating profit increased by 3%. The combined contribution from positive net flows of £31.2bn (2015: £33.3bn) and higher asset values in the second half, was partially offset by planned investment to grow the business, as well as the impact of ongoing industry fee pressure.
LGC operating profit increased by 10% due to strong performance in the division’s £1.1bn (2015: £0.9bn) direct investment portfolio which delivered £121m (2015: £69m) operating profit, of which 44% (2015: 28%) came from earnings in LGC’s operating businesses, including CALA Homes.
LGI operating profit was flat year-on-year, in part as a consequence of a £39m lower expected release from the UK retail protection back book, and adverse claims experience of £43m, primarily in group protection. The 2015 comparator for LGI was impacted by one-off reserve strengthening primarily relating to the modelling of reinsurance contracts in retail protection.
Profit before tax attributable to equity holders increased 17% to £1,582m (2015: £1,355m)
In 2016 profit before tax has increased by £227m on the back of the 11% increase in adjusted operating profit. In addition, positive investment and other variances contributed £80m (2015: £(75)m), demonstrating diversification benefits across the Group. This included £162m (2015: £(116)m) in LGC, primarily due to the traded assets portfolio outperforming our long term economic assumptions, and £36m (2015: £78m) in LGR. This was partially offset by £(123)m (2015: £(44)m) in LGI driven by a reduction in UK government bond yields of c.85bps which impacted the discount rate used to calculate the reserves for our UK protection liabilities.
The Group had a net loss on disposal in 2016 of £60m (2015: £25m) following the sale of Cofunds, IPS and Suffolk Life.
Additionally, the Group booked a £66m (2015: £8m) provision in respect of the closure of our Kingswood office. No further related costs are expected in the future.
The Group’s Solvency II surplus increased by £0.4bn since the half year, from £5.3bn to £5.7bn at the year end.
This incorporates management’s estimate of the impact of recalculating the Transitional Measures for Technical Provisions (TMTP) as at the end of 2016 as we believe this provides the most up to date and meaningful view of our Solvency II position. The conditions set out by the PRA to allow a formal recalculation of the Group’s TMTP were not met as at end 2016 but, in line with PRA guidance, a formal recalculation will take place no later than 1st January 2018.
As we stated at our Capital Markets Event on 5th December 2016, to assist with peer comparability, going forwards we will lead with coverage ratio defined on a shareholder basis which progressed from 163% at the half year to 171% at the year end. On a proforma basis of calculation, our Solvency II coverage ratio increased from 158% at the half year to 165% at the year end. The surplus is the same on both bases.
The Group remains focused on delivering appropriate returns on capital. In 2016, our Solvency II new business strain was less than £100m in a year when we wrote a record £7bn of new annuity business as we continued to deliver our capital efficient strategy.

We remain confident in outlook for the Group as our strategy is aligned to, what we believe to be, 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, coupled with increasing expertise, is expected to deliver further profit growth, built on our resilient IFRS and Solvency II balance sheets. With further political and economic uncertainty anticipated in 2017 and beyond, we expect further market volatility. The risk of slowing global economic activity remains and no business model can be fully immunised. However, we believe the opportunities available to the Group, primarily in the UK and US, remain attractive.


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