Fig 1. Ten Year Total Shareholder Return (%)

Chart data

Legal & General has a clear and consistent strategy. We operate in scale, we focus largely on the UK market, and we provide a wide range of value-for-money products backed by strong technical skills, excellent administration, multi-channel distribution and a customer service ethic.

Our underlying businesses again performed strongly in 2006. The 46% increase in our UK new business was achieved against a favourable economic backdrop and demographic changes that encourage long term saving and financial planning. Ultimately our success is due to having the right mix of well-designed competitively-priced products, sold through the most effective distribution channels.

Balanced Production

Legal & General’s broad product range differentiates us from other companies in the UK life and pensions sector. We maintain a wide product set, giving us flexibility to adjust to consumer preferences.

Our combination of protection, annuity, insurance and savings – including pensions – gives us a product range that can meet a customer’s needs at every stage of their life. Financial protection for individuals and their families often coincides with changes to mortgage arrangements. Flexible saving through unitised products or ISAs can be part of a series of long term saving vehicles, perhaps including employer or personal pension schemes. Ultimately, accumulated savings can be consolidated in the most efficient way, and a lifetime income purchased by way of an annuity.

Legal & General is active in all these retail markets, as well as providing group schemes, bulk purchase annuities and institutional fund management for employers and pension funds. In addition our Investment Management business has established itself as a leading provider of index tracking funds and other investment products.

Balanced Distribution

Balance and flexibility also underpin our distribution strategy.

We continue to expand distribution through new bank and building society partnerships, most recently with Nationwide, which with 11 million customers, is the country’s largest building society. Each partnership is different, but collectively our business partners have over 40 million personal finance customer accounts in the UK, and a powerful High Street presence. Some 60% of our retail sales are through IFAs. We constantly evolve our product and service offering to the advised sector. This includes developing multi-manager and platform solutions which widen choice and add to administrative convenience for IFAs. They make it easier for customers, with their advisers, to make asset allocation decisions. They also administer a portfolio of long term savings and investments managed by a variety of asset managers but held on a single online platform. Cofunds, the fund supermarket with which we have formed a strategic alliance and which now has over £11bn of funds under management, is an example of leadership in its sector.

In addition, our direct distribution capability serves our customers and enhances our offering to business partners.

Flexibility in profitable distribution will remain important to growth. In the future consumer purchasing patterns, and regulation of sales, may change – for example as a result of the Financial Service Authority’s upcoming Distribution Review. This will place a premium on those financial product providers best-adapted to an increasingly multi-channel distribution network.

Growth and Profitability

It is axiomatic to our strategy that growth should not be at the expense of profitability. We monitor margins closely across the product range and aim to adjust our business mix accordingly.

Occasionally where necessary, we make changes to our portfolio of business. For example, in April 2006 we launched a new Self-Invested Personal Pension (SIPP) product, and in General Insurance, we withdrew from the motor and subsequently the healthcare sectors.

Over 90% of new business is generated in the UK. Our strategy is strongly focused on our domestic market, though our overseas businesses – principally in the United States, France and the Netherlands – are valuable assets and solid performers. Strategically, we are open to new opportunities in different markets, but only where they satisfy our rigorous internal investment criteria.

Capital Strength

Capital strength enables us to take the strain of growing the business and provides security for long term customers and policyholders. It is a further strategic differentiator and is reflected in our AA+ financial strength rating from Standard & Poor’s. Excellence in the management of our capital is a key skill for a life company. Our previous capital structure has served us well for a decade, enabling us to deliver growth across a stock market cycle. The current capital review will ensure we balance capital strength, growth and shareholder return in the most efficient way. The Board currently intends to initiate a programme of returning capital to shareholders from the second half of 2007 where it is clear that there is excess.

This capital review is taking place against a changing regulatory and fiscal background. Our challenge is to have the right amount of capital, the right type of capital, and to deploy our capital in the right places. In late 2006 we took the first steps by establishing a new reinsurance company to assume our own pension and annuity liabilities. Further actions, which will provide long term benefits to our business, are planned in 2007.

A skilled workforce

During 2006 we realigned management responsibilities to create a clearer structure in our Protection and Annuities, Wealth Management and With-Profits businesses. These changes will deliver increased focus, end-to-end product and profit responsibility and improved efficiency. This will help us make the most of the very considerable skill base of our workforce.

Achievements and Outlook

2006 was a year of significant milestones for Legal & General. We are an established scale player in the UK market. Our bulk annuities business passed the £1bn single premium mark in new business during the year; despite the arrival of new competitors. Our wealth management business achieved significant sales growth, with over £11bn of new UK savings premiums. Our institutional fund management business added almost £21bn of new funds under management, taking us to £233bn in total.

Looking ahead, Legal & General’s scale gives us the opportunity to invest in the people and skills to make further gains in our markets. Our focus on core skills and products, and our balance sheet strength, position us well in markets which continue to provide growth opportunities. Our flexibility across product and distribution lines will enable us to adjust our business mix to concentrate on delivering growth and doing so profitably.

The UK’s underlying economic strength, combined with later retirement and improving longevity mean continuing growth in saving through long term financial products. Corporate activity to tackle pension fund deficits is positive for our institutional fund management and bulk annuities businesses. The mortgage market remains active which generates business flow for protection and general insurance businesses.

We remain of the view that our UK-led strategy of balanced production, balanced distribution and capital strength remains the right one to build on the success of 2006 and deliver further progress in 2007.

Tim Breedon
Group Chief Executive