Worldwide new business increased by 37% in Annual Premium Equivalent (APE) terms to £896m (H1 2005: £652m). New UK life and pensions business was 16% higher at £496m (H1 2005: £426m), driven by growth in savings, individual protection and bulk purchase annuities. UK retail investments new business more than doubled from £169m to £342m APE, benefiting from a large institutional transfer, but also from good underlying retail demand. Our investment management business attracted £10.8bn of new institutional funds under management.
On a European Embedded Value (EEV) basis, the Group’s profit before tax decreased marginally to £676m (H1 2005: £705m) as a result of lower equity market performance in H1 2006 compared with H1 2005. EEV operating profit was up 17% , reflecting strong results in our UK life, pensions and investment management businesses. The present value of new business premiums (PVNBP) margin on sales of UK life and pensions products increased from 4.6% for the full year 2005 to 4.9% , with higher margins in all non profit business categories. The internal rate of return on new non profit business was 16% in H1 2006 (FY 2005: 15% ). The contribution from new UK life and pensions business of £179m grew by 39% (H1 2005: £129m), benefiting from improved margins, sales and mix. Overall UK life and pensions operating profit was up 19% for the half year to £405m (H1 2005: £340m). Our overseas operations generated an increase of 13% in operating profit from £45m in H1 2005 to £51m in H1 2006.
On an International Financial Reporting Standards (IFRS) basis, operating profit increased by 12% from £298m in H1 2005 to £334m in H1 2006. Operating profit from our investment management business grew by 35% to £65m (H1 2005: £48m), demonstrating the benefits of scale and quality of execution. General Insurance operating profit was £2m for the half year (H1 2005: £4m). This lower level of profit was the result of closure costs associated with our decision to withdraw from our small position in the motor insurance market and increased competition in the broker channel.
The Board has recommended an interim dividend of 1.74 pence per share, an increase of 5% on the 2005 interim dividend of 1.65 pence per share. This will be paid on 2 October 2006 to shareholders registered at the close of business on 8 September. The shares will go ex-dividend on 6 September and a Dividend Re-investment Plan is available to shareholders.
UK life and pensions
Individual protection annual premiums grew by 16% to £78m (H1 2005: £67m), against a backdrop of an improved housing market. We successfully launched a pension term assurance product in April this year and are encouraged by performance to date, with the product recently accounting for over 30% of Independent Financial Adviser (IFA) life insurance applications.
Scale is critical in the individual protection segment, where we estimate that we have increased market share by three percentage points in Q1 2006 to nearly 20% (Q4 2005: 17% ). We continue to invest in our underwriting expertise and infrastructure to improve further our competitive position.
Group Risk annual premiums fell by 21% to £33m (H1 2005: £42m). 2004 and 2005 new business figures benefited from the withdrawal of a competitor at the end of 2003. We have seen broadly stable annual premiums in Q2 2006 of £16m against £17m in Q1 2006.
Overall, protection volumes increased by 16% to £555m in the first half of 2006 (H1 2005: £478m) on a PVNBP basis and by 2% on an APE basis. The PVNBP growth rate reflects the change in mix towards individual business, where, on average, we expect to receive premiums for longer than on group business.
The high level of competitive activity in the individual annuity market, which we noted during 2005, continued in the early part of 2006. Although single premium individual annuities decreased from £458m in H1 2005 to £209m in H1 2006, our competitive position improved significantly in the second quarter of 2006. Single premiums nearly trebled from £56m in Q1 2006 to £153m in Q2 2006, as bond yields rose and as customers, who had delayed their purchase until the application of new pensions A-Day tax rules, entered the market. The resulting uplift in application volumes has yet to be fully reflected in completed sales. As announced earlier this year, we became the default annuity provider for Skandia’s maturing pension customers in May. The bulk purchase annuity business saw high levels of sales and quotation activity in the first half of this year. We completed more than 150 new policies, with an average case size of just over £3m. This lifted single premiums by 52% to £499m (H1 2005: £329m). We continue to focus on service excellence and have substantial pricing and processing expertise, built up over some 20 years, in managing high volumes of schemes. We believe that there is opportunity for significant additional growth in new products offering longevity risk management to larger schemes and we have seen early signs of increased activity in this area.
Savings: Unit linked bonds
Legal & General’s Portfolio Bond was an important driver behind the 29% increase in premiums to £1,213m in the first half of 2006 (H1 2005: £939m). In the year to date, over 25% of new bond business from IFAs came through the Cofunds platform, which provides advisers with the opportunity to simplify their administration while offering access to a wide range of funds. We believe the strength of our open architecture offering will be an important factor in driving and shaping our bond business in the future.
We saw strong growth in pension volumes in the first half of 2006 to £535m from £471m in H1 2005 on a PVNBP basis, driven primarily by our success in the corporate segment. Taking advantage of the open architecture model, we launched our Self Invested Personal Pension on the Cofunds platform in April this year. The public debate on the future of pensions saving in the UK has, we believe, helped to increase awareness among consumers of the need to save for retirement. Additionally, pensions A-Day has stimulated the pensions transfer market, as investors seek to consolidate their assets into a single pool.
The strength of the pensions market has also fed into sales of pensions products written in the with-profits part of the long term fund. This includes those unit linked contracts which offer a with-profits option. The historically higher margin with-profits bond contracts continued to decline, decreasing by 59% to £42m of single premiums in H1 2006 (H1 2005: £103m).
The Cofunds platform continues to play an important part in our distribution strategy. At the end of January 2006, we made the Legal & General Portfolio Bond available to IFAs via the platform. This provides investors with the opportunity to invest in over 200 funds, with all the additional administrative benefits the platform technology offers. This was followed by the launch of our Self Invested Personal Pension in April. Both products have been well received by the IFA market. We are delighted with performance to date and will continue to invest in the integration of our products onto the Cofunds platform, in line with our original business plan.
Our business partnership with Connells, one of the UK’s largest estate agencies, began trading in the first week of July and, more recently, we announced an agreement with Citibank to offer protection products to their UK customers. We now work with over 30 UK banks and building societies as business partners.
The scale, breadth and efficiency of our distribution continue to underpin our success in the savings, protection and investment markets in the UK.
International life and pensions
Although market conditions remained difficult, sales in our US operation increased by 6% to £145m (H1 2005: £137m) on a PVNBP basis. New business was little changed in France at £195m (H1 2005: £198m) and increased by 10% in the Netherlands to £142m (H1 2005: £129m), driven largely by strong single premium sales. Overall, new business from our overseas operations rose by 4% to £482m.
UK retail investment sales of £342m APE in the first half of 2006 (H1 2005: £169m) benefited from a £1.3bn single premium institutional transfer. Funds under management stood at £19.3bn at 30 June 2006. Legal & General is currently the UK’s third largest retail investments provider (Source: Investment Management Association monthly rankings – May 2006).
Institutional fund management
Legal & General Investment Management achieved yet another outstanding new business result in the first half of 2006, winning £10.8bn (H1 2005: £6.9bn) of new funds under management. £1.9bn of this was received from non-pension fund institutions.
UK life and pensions
The contribution from new business increased by 39% from £129m to £179m, benefiting from improved sales, mix and margins.
The expected return from in-force business increased by 9% from £145m to £158m, reflecting the unwind of a lower opening discount rate of 7.1% (2005: 7.5% ) on a higher opening embedded value.
Opening adjustments to reflect a revision of assessments of prior and future tax resulted in a broadly net neutral impact on EEV operating profit. These have been reported as a positive experience variance and a similar reduction in the return from the shareholder net worth. Excluding this, underlying variances and assumption changes were a small positive. The bulk purchase annuity data loading project once again had a positive impact, with £17m in experience variances and £15m in assumption changes. Persistency, mortality and morbidity experience on our overall book of business are subject to full annual investigations and operating assumptions are normally fully reviewed during the second half. In the first half of 2006, there were small negative persistency variances on with-profits bonds and pensions, partly offset by positive mortality and morbidity experience variances from group protection business. In addition, there were minor expense assumption changes, relating to a number of products and to future office rental costs.
Development costs of £10m (H1 2005: £5m) relate primarily to the development of the Cofunds platform.
International life and pensions
EEV operating profit from our international operations grew by 13% to £51m (H1 2005: £45m), with increased results across our businesses. In the Netherlands, operating profit grew by 6% to £17m (H1 2005: £16m), reflecting higher sales and lower capital requirements on certain products. Operating profit in France increased by 40% to £14m (H1 2005: £10m) with improved margins. On the in-force book, adverse mortality assumption changes were offset by favourable persistency. In the USA, the decline in new business in 2005 increased the unit expenses in the first half of this year, giving rise to a negative margin of 1.9% on new business (H1 2005: positive 2.2% ). The margin does not include any benefit from Triple X financing, which we expect to complete in the second half of 2006. Higher expected return from in-force business was partially offset by a small adverse mortality variance. Total operating profit in the USA grew by 5% to £20m (H1 2005: £19m).
UK life and pensions
The distribution relating to non profit and shareholder net worth in any year is based on the formula which was agreed with our regulator. It is calculated as 7% of the embedded value of the shareholder retained capital (SRC) and Sub-fund and 5% of the embedded value of the non profit business. The shareholder net worth and the value of the non profit business both increased by 17% from H1 2005 to H1 2006. Overall, the UK life and pensions operating profit increased from £183m at H1 2005 to £215m at H1 2006. The with-profits transfer grew by 25% to £40m (H1 2005: £32m), reflecting increases in bonuses applied to a higher level of maturities and other claims.
International life and pensions
Higher results from our operations in the USA and France were offset by a reduction in reported profits in our operation in the Netherlands due to the accounting rules surrounding the valuation of assets and liabilities. On an IFRS basis, all assets but not all liabilities must be accounted for at fair value, giving rise to a £3m operating loss in H1 2006 against an £18m operating profit in H1 2005. Further volatility should be expected. Operating profit from our US operations increased by 22% to £33m (H1 2005: £27m), reflecting the increased size of the book. In France, operating profit increased to £7m (H1 2005: £nil), largely as a result of gains made on a property sale.
Operating profits from our investment management business increased by 35% to £65m (H1 2005: £48m), demonstrating the scalability of the business and continued focus on cost control. The cost/income ratio remained stable at 36% (H1 2005: 36% ).
As a result of strong new business inflows, funds under management increased from £204bn at 31 December 2005 to £211bn at 30 June 2006. £152bn of funds at 30 June 2006 were managed on behalf of external clients.
The results of our managed pension funds business on an EEV basis can be found on page 13 of this report. These results reflect growth in new business volumes and the continued benefit of strong persistency.
Operating profit in our General Insurance business decreased from £4m in H1 2005 to £2m in H1 2006. This is after providing for £4m in closure costs following our decision to withdraw from our small position in the motor insurance market and to focus on building the household insurance book. We will be ceasing to write new motor insurance business or renew existing cover with effect from 1 September 2006. The motor book generated an operating loss before closure costs of £1m in the first half of 2006 (H1 2005: operating loss of £3m).
Our household insurance business offers greater synergies with our existing protection businesses. 38% of mortgages completed via our Legal & General Partnership Services Ltd network in the first half of the year also included our household insurance. The business saw stable gross premium income of £115m in the first half of this year (H1 2005: £115m). Operating profits were unchanged at £2m (H1 2005: £2m), as an improvement in weather claims was offset by increased competition in the broker channel.
Other operational income
Interest expense has increased following the issuance of €600m of subordinated debt in June 2005. This has been offset by the increased investment return of £69m (H1 2005: £55m), reflecting investment of the issue proceeds prior to their being used to repay the convertible debt in December 2006.
The Group’s profit before tax decreased marginally to £676m (H1 2005: £705m), with lower equity market performance in the first half of this year compared with the prior period. The investment return on the equity and property portfolio of the UK long term fund was 2.1% above the assumption for the period (H1 2005: 3.7% ).
The pre-tax contribution from SRC reduced from £116m in H1 2005 to £39m in H1 2006 as a result of lower investment returns and a lower net capital release from the non profit business of £110m pre-tax (H1 2005: £138m) and £77m net of tax (H1 2005: £97m).
Within this net release, the new business strain of £279m before financing (H1 2005: £207m) was covered by the expected release from the in-force book of £290m before financing (H1 2005: £198m), all on a net of tax basis. A second tranche of term assurance financing had a benefit of £94m to support new business strain, offset by a £26m partial repayment of the financing put in place in 2005. The overall impact of other movements on the net capital released after tax was a negative £2m (H1 2005: positive £106m).
The Group is required to measure and monitor its capital resources on a regulatory as well as an IFRS basis and to comply with the minimum capital requirements of regulators in each territory in which it operates. In general, the regulators require more prudent assumptions than IFRS. Legal & General’s total capital resources are substantially in excess of both total regulatory capital and the minimum regulatory capital it is required to hold.
At Group level, the Insurance Groups Directive capital surplus was £2.3bn (31 December 2005: £2.4bn) in excess of the required capital of £3.8bn (31 December 2005: £4.4bn).
The total regulatory capital resources available to Legal & General Assurance Society Limited, the Group’s main UK operating subsidiary, amounted to £8.1bn at 30 June 2006 (31 December 2005: £8.5bn) which included an implicit item of £425m (31 December 2005: £540m) in respect of non profit business, and exceeded the total capital requirements by £4.5bn (31 December 2005: £4.4bn). As at 30 June 2006, the value of the assets supporting the UK with-profits business was estimated to have exceeded realistic liabilities by £907m (31 December 2005: £842m). The required Risk Capital Margin (RCM) for the with-profits part of the fund, calculated by reassessing realistic assets and liabilities in financially stressed conditions, was £244m at 30 June 2006 (31 December 2005: £327m). The RCM continued to benefit from management actions, which included refinements to our management of investment market risk.
In March 2006, the £400m undated subordinated notes (upper tier II regulatory capital) raised in March 2004 and required to be treated as equity at the end of 2005, were reclassified as debt following the modification of terms to remove the discretionary nature of the interest.
The UK market continues to offer significant opportunities. The public debate around the future of pensions saving in the UK, as well as activity surrounding Pensions A-Day, has increased awareness of the need to save. We expect this to continue to stimulate the savings and investment markets.
We believe there are further opportunities for Legal & General arising from evolution in the pensions arena. In the bulk purchase annuity market, we continue to see strong demand from pension funds seeking to manage mortality, investment and expense risk. Activity remains high and we believe there are early signs of greater demand from larger schemes. Our investment management business continues to benefit from its reputation for excellence in managing pension fund assets.
Open architecture is changing and improving the way we do business with IFAs, tied partners and customers. This technology, which provides a single point of access to multiple funds and investment options, has already made a positive impact in our bond business and has the potential to do so in the pensions segment.
We continue to invest in our technology, our processes and our expertise to ensure that we are able to take advantage of opportunities in our core UK markets going forward.