Legal & General Regulatory News (LGEN)

2019 results: EPS1 up 16% to 28.7p, ROE 20.4%, record Pension Risk Transfer sales of £11.4bn and LGIM external net flows of £86bn

Financial highlights2

· Operating profit from continuing divisions3,4 up 17% to £2,514m (2018: £2,152m)

· Operating profit3 of £2,131m, up 12% (2018: £1,902m)

· Earnings per share1 of 28.66p, up 16% (2018: 24.74p)

· Return on equity at 20.4% (2018: 22.7%)

· Full year dividend up 7% to 17.57p per share (2018: 16.42p)

· Profit after tax up 16% to £1,700m (2018: £1,468m) excluding mortality reserve release, including mortality reserve release profit after tax5 was £1,834m (2018: £1,827m)

· Net release from continuing operations up 15% to £1,606m (2018: £1,396m)

· Solvency II operational surplus generation up by 9% to £1.6bn (2018: £1.4bn)

· Solvency II coverage ratio6 of 184% (2018: 188%)

Business highlights

· Pension Risk Transfer sales7 of £11.4bn (2018: £9.1bn), including $1.1bn of US PRT (2018: $0.8bn)

· Individual annuity sales up 22% to £970m (2018: £795m)

· Group-wide Direct Investment up 34% at £25.7bn (2018: £19.2bn)

· LGIM AUM up 18% at £1,196bn (2018: £1,015bn)

· LGIM external net flows of £86.4bn (2018: £42.6bn)

· Insurance GWP up 6% to £2,729m (2018: £2,580m)

Financial summary

2019 Financial performance

Income statement

Operating profit from continuing divisions[13] increased 17% to £2,514m (2018: £2,152m), with all businesses delivering growth over prior year.

LGR delivered operating profit13 of £1,414m (2018: £1,115m), driven by strong new business volumes and the consistent performance of the growing annuity portfolio. In H2 2019 we reviewed our future longevity improvement assumptions and have conservatively adopted an adjusted version of the CMI 2017 mortality tables for LGR's annuity book, resulting in a reserve release of £155m. Including this mortality reserve release, operating profit was £1,569m (2018: £1,548m).

LGIM operating profit increased by 4% to £423m (2018: £407m). Strong external net flows of £86.4bn (2018: £42.6bn), together with positive market valuations over the year, resulted in an 18% increase in total AUM to £1,196bn (2018: £1,015bn). Total revenues increased by 8% to £912m (2018: £847m), lower than AUM growth due to new business mix, which had a significant contribution from a £37bn passive mandate in H1. LGIM has continued to invest in the business to achieve the resilience and scalability fundamental to its future success, which is reflected in a cost income ratio of 54% (2018: 52%).

LGC operating profit grew 13% to £363m (2018: £322m), led by direct investment operating profit, which was up 15% over the year (2019: £217m, 2018: £188m). CALA delivered revenue of £1bn, growing 6% since 2018. The LGC direct investment portfolio increased to £2.9bn (2018: £2.4bn), progressing in line with LGC's stated ambition of increasing its direct investment AUM to c.£5bn over the next three to five years.

LGI operating profit increased 2% to £314m (2018: £308m), reflecting stable profit delivery in highly competitive UK markets, while the US Term Protection business transitioned towards a more digital operating model.

Disposed operations contributed £11m to operating profit (2018: £79m). This included £46m from Mature Savings, reflecting the unwind of expected underlying profits, partly offset by a £35m operating loss from the General Insurance business due to higher claims inflation. The General Insurance sale completed in 2019 and the Mature Savings sale is expected to complete in H1 2020.

As previously indicated, we have continued to make measured investments in technology to enhance customer experience, drive cost efficiencies, gain access to growth areas and to comply with the evolving regulatory framework, resulting in an increase in Group investment projects and expenses of £60m (2019: £(186)m; 2018: £(126)m). The additional expenditure over the near term primarily relates to augmenting cyber security and upgrading the IT infrastructure, including preparation for IFRS 17, and should reduce towards historic levels once these projects are delivered.

Balance sheet

The Group's Solvency II operational surplus generation increased 9% to £1.6bn (2018: £1.4bn). New business strain was £0.6bn (2018: £0.5bn) reflecting record UK Pension Risk Transfer (PRT) volumes written at a capital strain of less than 4%, which typically has a payback period of five years. This resulted in net surplus generation of £1.0bn (2018: £0.9bn) and supported a Solvency II coverage ratio[14] of 184% at the end of 2019 (H1 2019: 171%, FY 2018: 188%). As at 28 February 2020, we estimate the ratio was 174%.[15]

On a proforma calculation basis[16], our Solvency II coverage ratio was 179% at the end of 2019 (FY 2018: 181%).

We continue to deliver a strong IFRS return on equity of 20.4% (2018: 22.7%).[17] 

Group strategy

Five businesses

Over the past several years, Legal & General has successfully transitioned into high growth / high return businesses from lower growth / lower return businesses. We have a focused business model which targets two types of markets, (i) large markets, where we have a relatively small market share and we can outpace market growth, and (ii) growth markets where we already have a leading market share and where we can grow by retaining market leadership. We have sold businesses that were either sub-scale or in geographies where we were unlikely to achieve financial success, generating £1.5bn of disposal proceeds. These proceeds have been reinvested to fund future profitable growth for shareholders.

We have achieved a clean structure comprised of five businesses:

1. Legal & General Retirement Institutional (LGRI) offers pension risk transfer (PRT) to institutional clients globally

2. Legal & General Retirement Retail (LGRR) provides individual annuities and lifetime mortgages (LTMs) in the UK

3. Legal & General Investment Management (LGIM) is the 14th largest global asset manager by AUM[18]

4. Legal & General Capital (LGC) invests shareholder capital and builds an alternative asset pipeline for LGRI, LGRR and LGIM

5. Legal & General Insurance (LGI) sells retail and group protection in the UK and retail protection in the US

These businesses are aligned to six long term growth drivers, which are the core of Legal & General's strategy.

Six growth drivers

Inclusive Capitalism is the foundation of Legal & General's strategy. By identifying and addressing systemic market dislocations, we are able to generate attractive, sustainable returns while delivering products or investments that are economically, socially, and environmentally useful.

Since 2011 we have delivered total shareholder returns of 387% and grown EPS by 11% per year.[19] At the same time, we provide security in retirement to more than 3 million people as we have invested their pensions into £26bn high quality direct investments that deliver positive social and environmental impacts, such as clean energy and affordable housing.

We have been adept at identifying the right opportunities, focussing on six global, long-term growth drivers which are structural rather than cyclical. Responding to these drivers creates sustainable profits and positive social and environmental outcomes as we harness the power of pensions.

1. Ageing demographics

As populations live longer their pensions need to last longer too. Companies increasingly need to find solutions to their ongoing pension commitments which can apply pressure on their financial resources. At the same time, individuals need to ensure that their retirement funds and other assets can finance longer retirements.

LGRI and LGRR meet the customer need arising from ageing demographics, providing financial security in retirement.

2. Globalisation of asset markets

Asset markets are increasingly globalised and growing - worldwide AUM is currently $74 trillion and is expected to increase to around $101 trillion by 2023, representing an enormous opportunity for international asset managers. North America, Asia Pacific and Europe are all attractive markets which continue to expand.

Legal & General looks for selective opportunities to build and expand its successful UK business model abroad into markets where we believe we can thrive. The globalisation of asset markets has been a cornerstone of LGIM's growth strategy, where international AUM has more than doubled over the past three years to £370bn, and a driver for LGRI's US expansion, which has written more than $3.5bn of premium since the business started in 2015.

3. Investing in the Real Economy

Throughout the UK and beyond, there has been a long-term trend of underinvestment in major towns and cities, and we continue to experience a serious housing shortage, while Small and Medium Enterprises (SMEs) also struggle to achieve scale without access to long-term capital.

Across the Legal & General Group we harness the power of pensions by investing pension assets into the Real Economy, delivering financial security for pensioners and fostering growth in cities and towns across the UK. Furthermore, in LGC we invest in alternative assets such as Build-to-Rent and affordable housing, as well as Venture Capital and SME financing through Pemberton.

4. Welfare reforms

The need to protect people from financial uncertainty continues. This includes helping people take personal responsibility for saving for their retirements and safeguarding their financial wellbeing and resilience.

LGI offers life insurance, income protection and critical illness cover, and, through our stake in Salary Finance, salary savings and lending services, providing financial stability to customers' families and dependents. As fewer companies offer DB pensions and a greater burden is placed on social security programmes, LGIM helps individuals save for the future while LGRR provides financial security in retirement.

5. Technological innovation

Consumers, clients and businesses look to digital platforms to help organise their finances and working lives. Technological solutions can increase security and improve the way we work and how we access information. This can mean the difference between success and failure in business.

Throughout the Legal & General Group, our businesses look for opportunities to improve customer service and efficiency through technology.

6. Addressing Climate Change

Scientists, policy-makers, markets and regulators increasingly agree that we must move to a global warming trajectory below 2°C to avoid potentially catastrophic physical risks which will impact global economies, markets, companies and people. This implies massive transition to a lower-carbon economy, which in turn creates risk management challenges but also substantial new growth opportunities, including in renewables and innovative technologies.

Whilst Addressing Climate Change is formally a new addition to our growth drivers in 2019, it is not new to our approach. Across the Legal & General Group we seek ways to address Climate Change by building scalable, profitable businesses to reduce carbon emissions. LGIM continues to build on its strong heritage in Environmental, Social and Governance (ESG) investing for its clients and, increasingly, we see opportunities in LGC, LGRI, and LGRR to make investment decisions informed by Climate Change. To date, we have invested more than £1.3bn of Legal & General's own assets into renewable energy investments, predominantly solar and offshore wind, as well as taken a stake in PodPoint, one of the UK's largest electrical vehicle charging operators.

Together these drivers have led us to participate in material, high growth markets where we are leaders or where we can leverage our expertise to increase our market share.

A unique, synergistic business model

Our strategy has positioned us to be a leader in the pension asset management and insurance markets, benefitting from a mutually reinforcing business model and unique synergies in pension de-risking and asset manufacturing and management:

· LGRI, a market leader in UK PRT, and LGRR, a leading provider of UK individual annuities, have £76bn of assets, providing long-term, captive AUM to LGIM. This portfolio is continually being enhanced with direct investments originated by LGC.

· LGIM is the market leader in providing investment management to UK DB pension scheme clients, specifically through index, fixed income and LDI strategies. This provides LGRI with a strong pipeline: 51% of our pension risk transfer (PRT) transactions over the past three years were from existing LGIM clients.[20] LGIM has leveraged its UK DB capabilities to become a leading asset manager for UK defined contribution (DC) pension scheme clients, and is also successfully growing overseas.

· LGC uses shareholder capital to achieve two clear goals:

1. To deliver attractive financial returns for our shareholders by creating real alternative assets and operating businesses and leveraging Legal & General's existing businesses, network of relationships, brand, and expertise

2. To self-manufacture attractive, Matching Adjustment-eligible direct investments to back LGRI and LGRR's growing annuity liabilities and to create assets for LGIM's clients

· LGI is a market leader in UK protection and US brokerage term life insurance, and provides significant Solvency II benefits to the Group by partially offsetting new business strain in LGRI and LGRR. Additionally, LGI's US business facilitates LGRI's US PRT transactions, which are written onto the existing US balance sheet.

The synergies within our businesses drive profits and fuel future growth, allowing the Group to regularly deliver an ROE of c.20%. 

Outlook

Our strategy and growth drivers have yielded reliably strong returns, both dividend and ROE, for our shareholders and we are confident they will continue to deliver growth into the future as we execute on our strategy based on inclusive capitalism.

Our focused and consistent strategy has delivered 11% EPS CAGR since 2011.[21]  We have achieved our five year ambition of 10% EPS CAGR (58% growth over the period) in just four years, reporting underlying EPS of 28.66p in 2019, 12% annual growth since 2015.  As previously reported, Legal & General is well placed to continue to grow organically, supported by ongoing judicious and considered investment in technology across the Group, and strong competitive positioning in attractive and growing markets. We remain confident in our strategy and our ability to deliver future growth and, having successfully delivered on our previous stated ambitions, we plan to update these at a Capital Markets Event on 12 November 2020.

Our confidence in future growth and dividend paying capacity is underpinned by the Group's strong balance sheet with £7.3bn in surplus regulatory capital and significant buffers to absorb a market downturn. We have a proven operating model which is reinforced by robust risk management practices.

LGR's Institutional (LGRI) business participates in the rapidly growing global pension risk transfer (PRT) market, focussing on corporate defined benefit (DB) pension plans in the UK, the US, the Netherlands, Ireland, and Canada, which together have more than £5 trillion of pension liabilities due to ageing demographics.[22] 

The UK is currently our primary market, where we are an established leader and the only PRT provider to operate continuously for more than thirty years. Although the UK is the most mature PRT market globally, it still represents an enormous opportunity as only c.11% of the £2.1 trillion of UK DB pension liabilities have transferred to insurance companies to date.[23]

We estimate more than £40bn of UK PRT was underwritten in 2019, nearly double the 2018 level, which includes six of the ten largest UK PRT transactions. Demand from companies and pension plans for insurance remains robust, with more than £770bn of PRT demand potentially arising in the UK over the next decade.[24] In order to better address demand from pension plans, we have bolstered our structuring expertise in order to develop capital-light solutions, such as our new Assured Payment Policy. Whilst new PRT business requires solvency capital on day one, this capital commitment pays back quickly, and generates an attractive and long-term flow of operating surplus for the business. Our intention is to write £40bn to £50bn of new UK PRT over the next five years to help fuel future growth.

The US represents a significant market opportunity, with $3.5 trillion of DB liabilities, of which only c.6% have transacted to date.[25] 2019 was our first year to write more than $1bn of premiums in a single year, including our first fully retained transaction for more than $200m, heralding a new phase of growth for our US business. Since our market entry in 2015, our US business has written more than $3.5bn of PRT with 53 clients, including twelve transactions in 2019.

As always, we remain disciplined in the deployment of our capital, and we select opportunities that allow us to invest at high credit quality and meet our return targets.

LGR Retail's (LGRR) target market continues to expand, both in terms of the numbers of retirees and the levels of wealth they hold, driven by ageing demographics and welfare reforms. LGRR works closely with LGIM to deliver and develop a broad range of retirement solutions to customers.

There are £40bn of personal pension assets coming to maturity each year in the UK, with the individual annuity market accounting for only £4.5bn of the total maturing assets.[26] LGRR seeks to expand its addressable market through product innovation and has already succeeded in improving its enhanced annuity offering over 2018 and 2019. We continue to focus on customer service innovation and building distribution relationships. We have introducer agreements with AEGON, ReAssure, and Sun Life Financial of Canada and in November 2019 we added an introducer arrangement with Prudential, which is expected to increase LGRR's total annuity sales in 2020 by 15%.[27]

Despite competition within the LTM market we achieved a 25% market share in 2019. This is slightly lower than that seen in previous years, as we focussed on maintaining our pricing and underwriting discipline. With £1.8 trillion of housing equity owned by UK individuals over the age of 55, we believe that the slowdown seen in the overall LTM market is temporary and that there is room for further growth in this developing market as individuals access their housing wealth to provide themselves a secure retirement.[28]

LGRR leads the servicing initiative for our Retirement customers and works with individuals to better understand their needs and objectives. During 2019 we made further strides to enhance customer experience leveraging on technological innovation within the Group. For example, we have made purchasing an annuity easier through our development of Annuity Ready, a whole-of-market retail annuity comparison service. Annuity Ready has been developed and run by theidol.com, part of LGI's Fintech area. In response to customer feedback, we acquired MyFutureNow, a platform which will allow customers to trace their lost or forgotten pension pots and provides a single dashboard view of an individual's pension savings portfolio. Beyond products, we provide a range of support to vulnerable customers, including through our partnership with the Royal Voluntary Service. Our mission is to support individuals all the way along the retirement journey, providing them the tools and products they need to make sound, informed financial decisions in order to have as full and colourful life in retirement as possible for them.

As in previous years, LGR will review its longevity trend assumptions against updated experience data and intends to make any amendments, as necessary, in H2 2020 to reflect its analysis of the next set of mortality tables (CMI 2018) and LGR's specific data.

Investment Management (LGIM) continues to benefit from global trends in retirement saving and structural shifts in product demand. This is driving an increase in customer appetite for our diverse range of products and investment capabilities spanning Index, Active, Multi-asset, and Alternatives, underpinned by a thoughtful and pro-active approach to ESG. On average LGIM has delivered net flows, expressed as a proportion of opening AUM, of 5.4% per annum over the last five years. LGIM's AUM now stands at £1.2tn.

Over the last three years LGIM's international AUM has doubled to reach £370bn - 31% of LGIM's total AUM. LGIM plans to continue growing International AUM at pace, with a particular focus on the US, Asia and European retail/wholesale markets. As such, we were pleased to secure a £37bn passive mandate with the Japan Government Pension Investment Fund in the first half of 2019.

LGIM intends to maintain its strong position in the UK, which has been the bedrock of the firm's success to date, while diversifying its capabilities. LGIM is a leading player in providing UK DB de-risking solutions and is the market leader in UK DC - a market with significant growth potential - with total assets of £94.3bn (2018: £70.8bn). The DC market represents an enormous opportunity with total UK DC assets expected to more than double by 2028 to £955bn.[29] In addition to diversifying our client-base, we also look to diversify and build our product offering, particularly focussing on Real Assets and ESG as we leverage the skills developed within LGC, LGRI and LGRR in managing our £76bn annuity portfolio.

LGIM continues to invest in the business to achieve the resilience and scalability critical to its future success. To this end, we are automating and simplifying our business through investment in data analytics, providing a digital experience for our customers, and optimising our investment platforms. Furthermore, a portion of LGIM-related project expenditure, currently reflected in Group expenses, will be allocated to the LGIM segmented results from 2020.

LGIM is well positioned to continue to drive net flows, and to deliver meaningful earnings growth, as it continues to leverage its core strengths, and to expand internationally.

Legal & General Capital (LGC) will continue to seek opportunities to deploy its long-term capital in alternative assets where we see an enduring need for private long-term capital to support future cities, housing, and innovative funding for SMEs and early stage enterprises. Over the next three to five years we expect to increase our diversified direct investment portfolio to c.£5bn (2019: £2.9bn) with a target blended portfolio return of 8% to 10%.

Our Future Cities portfolio has invested almost £1bn into the Real Economy across fourteen UK towns and cities and we expect to invest further in these locations and others. Utilising capabilities in infrastructure, clean energy, commercial real estate and residential property, Legal & General Group is well placed to bring together on-balance sheet (LGR and LGC) or third party private capital (LGIM) with the development capability to make a difference to UK cities, deploying the power of pensions to deliver inclusive capitalism and address Climate Change. For example, in 2019 our Future Cities business announced that Legal & General has committed up to £4bn of funding to Oxford University over the next ten years from LGC, LGR and LGIM-managed funds, and committed £100m to Sunderland City Council's regeneration scheme, backed by LGR.

LGC's housing platform continues to grow its diversified housing creation business across build-to-rent, build-to-sell, later living, and affordable housing. The affordable market remains in need of significant investment, with more than 1.4m households on UK waiting lists for homes. We have already secured a pipeline of c.3,500 new affordable homes, comprising a Gross Asset Value of around £750m and are generating investment opportunities for LGR. Our ambition is to deliver 3,000 affordable homes annually by 2023. We plan for ambitious growth across the other components of our diversified housing platform, particularly in our Later Living business where we have sold more than 500 homes to date and plan to deliver a further 3,000 new retirement homes over the next five years, providing attractive options for the 3.1m people in the UK actively seeking to downsize. In the first full year of L&G's 100% ownership of CALA, the business has grown again in terms of units and profits, with nearly 2,500 new homes completed.

We are developing and growing our alternative asset capabilities, creating a diverse and profitable portolio of assets which complement LGIM's portfolio and support LGR's growth both today and into the future. In SME Finance, we expect to continue to deploy our capital and focus to support the UK venture ecosystem to help create the businesses of tomorrow, whilst continuing our support of Pemberton in the provision of private credit to the European mid-market.

In Insurance (LGI), we anticipate continued premium growth across our UK and US businesses.

In the UK, we expect our market leading retail protection business to grow new business premiums and to generate good profits in 2020, supported by the strength of our distribution relationships, investment in our systems and platforms, and product enhancements. We have completed the successful turnaround of our group protection business as reflected by the strong performance in 2019, and we are well positioned to increase market share in 2020.

In the US, we anticipate our on-going investment in technological innovation and new partnerships to position us for new business growth while maintaining healthy profits. We plan to use technology to increase our share of the emerging direct life insurance market, adding to our successful US offering, where we are already the largest provider of term life assurance in the brokerage channel by policy count.

In LGI Fintech, we expect continued growth from Salary Finance both in the UK and the US as the business gains access to more employees and diversifies the products and services offered. We also expect our investments and developments in the UK mortgage market to deliver growth as we make the journey to buy and finance a house easier and more efficient for everyone involved.

Full year dividend up 7%

Legal & General has a progressive dividend policy reflecting the Group's expected medium term underlying business growth, including net release from operations and operating earnings. There is no change to our dividend policy.

Taking into account sustainability across a wide range of economic scenarios and the Group's anticipated financial performance, the Board has recommended a final dividend of 12.64p (2018: 11.82p) giving a full year dividend of 17.57p (2018: 16.42p), 7% higher than 2018.  

Legal & General Retirement

Operating profit up 27% to £1,414m[30]

Operating profit increased to £1,414m30 (2018: £1,115m30), driven by record UK PRT new business volumes for a second year running, 22% growth in retail annuity sales, and consistently strong profits emerging from Legal & General Retirement (LGR)'s growing annuity portfolio, further bolstered by routine assumption updates.

In H2 2019 we reviewed our future longevity improvement assumptions and have conservatively adopted an adjusted version of the CMI 2017 mortality tables for LGR's annuity book resulting in a £155m reserve release. Including the reserve release, operating profit was up 1% at £1,569m (2018: £1,548m).

We constantly evaluate the appropriateness of our longevity trend assumptions and we are currently reviewing the CMI 2018 mortality data which we expect to complete by the end of 2020. We are prudent in our assessment of longevity trends and will only recognise releases after full analysis of the most recent data.

Release from operations was £598m (2018: £551m), an increase of 9%, reflecting the scale of the business as prudential margins unwind from our growing £75.9bn annuity fund (2018: £63.0bn).

Net release from operations increased 20% to £925m (2018: £768m) with new business surplus of £327m (2018: £217m), reflecting record annuity new business volumes.

During 2019 we wrote £11,295m of UK annuities delivering a 7.9% Solvency II new business margin, including UK PRT new business volumes of £10,325m with capital strain of less than 4%. This strong performance demonstrates LGR's constant pricing discipline and the supply and demand dynamics in the PRT market.

Gross longevity exposure was £80.4bn across LGR's annuity and longevity insurance business. We have reinsured £31.3bn of longevity risk with thirteen reinsurance counterparties, leaving a net exposure of £49.1bn. We continue to see significant supply and competition in the reinsurance market. 

LGR Institutional - Global Pension Risk Transfer

In 2019 LGR Institutional (LGRI) completed £11,392m (2018: £9,140m) of bulk annuities across 42 deals globally, including our first transaction in Canada and record years for both our UK and US businesses.

For the second year running, UK PRT volumes reached all-time highs, with the market breaking £40bn in bulk annuity sales for the first time. Legal & General maintained its position as a market leader and wrote £10,325m across 28 deals as we served pension plans of all sizes and issued bulk annuities ranging from £2m to more than £4.6bn in 2019.

LGRI's brand, scale and asset origination capabilities through synergies with, and expertise within, LGIM and LGC are critical to our market leadership in the rapidly growing UK PRT market. In 2019 we have demonstrated our market leadership and innovation by writing a series of transactions that demonstrated our solutions capabilities, including:

· A £4.6bn pension buyout for the Rolls-Royce UK Pension Fund, the largest UK bulk annuity underwritten at the time, building on LGIM's longstanding relationship as investment manager for the c.£14bn pension plan since 1989.

· A third and final bulk annuity for Hitachi Data Systems Retirement Benefits Plan, the culmination of a seven year de-risking journey to provide all plan members with a Legal & General annuity.

· A £1.6bn bulk annuity with National Grid UK Pension Scheme, a £20bn DB pension plan.

· One of the first transfers from fiduciary management to pension buyout, leveraging Legal & General's unique position as the only UK pensions fiduciary manager (LGIM) with a leading PRT provider (LGRI).

· A £250m Assured Payment Policy, a new capital-light PRT product, for AIB Group UK Pension Scheme. The policy provides asset yield, interest rate and inflation risk protection to the pension plan, paving a more secure path to buyout over a planned timeframe.

Additionally we have used technological innovation to serve smaller pension plans more efficiently; over 2019 our technology investments have increased the speed of pricing by 66% for this market segment.

Our business model has been very successful for us in the UK and we are continuing its expansion abroad into similar pensions markets.

International PRT premiums were £1,067m (2018: £789m). LGRI continued its international expansion into Canada where we wrote our first transaction for more than CAD $200m through our strategic Canadian partnership with Brookfield Annuity Company.

Our US PRT premiums surpassed $1bn for the first time, an increase of 35% (2019: $1,140m, £893m; 2018: $844m, £646m). We have now underwritten more than $3.5bn of US PRT transactions with 53 clients[31] through nine different intermediaries since entering the market in 2015. During 2019 our US business entered its next phase of growth by writing its first transaction of over USD $200m, and more than 40% of our 2019 US annuity transactions were for more than $100m (2018: 5%).

LGR Retail - Individual Retirement Solutions

Individual annuity sales were up 22% to £970m in 2019 (2018: £795m), benefiting from our improved enhanced annuity proposition and increased intermediary presence. Our introducer arrangement with Prudential, which began in November 2019, is expected to increase LGRR's total annuity sales in 2020 by 15%.[32] LGRR also has similar arrangements with AEGON, ReAssure and Sun Life Financial of Canada. We are one of the leading players in the UK individual annuity market and have more than doubled our market share since 2016, with a current market share of 17.2%[33]. Our strong heritage in individual annuities means that they account for approximately one quarter of the Group's total annuity assets.

Lifetime mortgage advances were down 19% to £965m (2018: £1,197m), as we maintained pricing and underwriting discipline. Despite competition within the market, LGRR was able to achieve a market share of 25%[34], driven by our wide range of products and strong customer-focused brand. We have continued our customer-focused innovation, unveiling our Retirement Interest-Only Mortgage in late 2019 to address the growing number of individuals reaching retirement with interest-only mortgages. At the end of 2019, LTMs were 6% of our total annuity assets and our LTM portfolio had an average customer age of 70 and a weighted average loan-to-value of c.28% at the transaction date. 

On-going credit and asset management

LGR's £75.9bn 'A minus' rated asset portfolio backing the IFRS annuity liabilities is well diversified by sector and geography.[35]

Credit portfolio management

LGR's £70.1bn fixed income portfolio is comprised of £52.4bn of listed bonds and £17.7bn of direct investments. Approximately two-thirds of this portfolio was rated A or better, 33% rated BBB and 1% sub-investment grade. Just 22% of the bond asset portfolio was invested in UK-listed corporate credit, many of these being multinationals. We have avoided sectors which we believe are at risk of significant disruption, for instance traditional retail and automotive, which together constitute less than 2% of our portfolio.

Additionally, we are reviewing and managing our portfolio to better integrate and manage climate change risks; when making new investment decisions we have put constraints on companies involved in coal extraction and coal-based electricity production and have set carbon intensity targets to monitor alignment with the Paris Agreement objective. In 2019 we have reduced the carbon emissions of the Group's asset portfolio by 6%, which is dominated by LGR's annuity asset portfolio.

The principal objective of our annuity-focused, fixed income fund managers in LGIM is to manage the portfolio to avoid credit downgrades and defaults. We constantly review our asset portfolio, including sector allocations and asset classes, in order to manage portfolio credit quality and to mitigate risks. We have vigorously stress tested our portfolio to build resilience against a range of scenarios and hold a £3.2bn IFRS credit default reserve.

Direct Investment

LGR originated £4.3bn of new, high quality direct investments during the year which, along with market movements, brought the portfolio total to £21.6bn[36] (FY 2018: £15.7bn).

Within the direct investment portfolio, fixed income assets accounted for £17.7bn of AUM, including £4.7bn in LTMs. Consistent with the broader bond portfolio, two-thirds of the direct investment bond portfolio was rated 'A' or above based on strong counterparties and collateral, using robust and independent rating processes which take account of long term stress events. We invest in sectors where long term funding is needed, such as government infrastructure. For example, we completed funding of a further £510m in long term leases on Her Majesty's Revenue & Customs buildings across the UK during 2019.

The Group's long term illiquid liabilities and large balance sheet size enable it to invest in assets of size and term that differentiate it from many other institutional investors. Direct investments are one of the key components of our investment strategy supporting bulk annuity pricing, and we regularly assess the relative value of our different direct investment asset classes against each other as well as against the risk-reward characteristics of global traded bonds.

We see particular opportunity in the build-to-rent and affordable housing asset classes, building on the strong capabilities within LGC Homes and LGIM Real Assets. During 2019 LGR funded its first build-to-rent investment in London for £250m and added several affordable housing assets to its portfolio, including a £45m financing of public housing in Croydon, a suburb of London. Under the arrangement, LGR takes credit risk to the local government, secured by the properties.[37] We have a growing pipeline of investment opportunities in build-to-rent and affordable housing. Across the Legal & General Group, our businesses help meet the societal needs arising from welfare reforms, harnessing the power of pensions to deliver inclusive capitalism. 

Our ability to self-manufacture attractive, long-term assets to back annuities, working with LGIM, LGC, or through LTMs, is a differentiating feature of LGR's business and remains a key competitive advantage. 

Legal & General Investment Management

1. Please see disclosure 1.04 for further details.

2. Excludes revenue and costs from the Workplace Savings business.

3. International asset net flows are shown on the basis of client domicile.

4. International AUM includes assets from internationally domiciled clients plus assets managed internationally on behalf of UK clients.

External net flows of £86.4bn, operating profit up 4% to £423m

LGIM has continued to expand and diversify its business across channels, regions and investment capabilities. This contributed to 18% growth in assets under management (AUM) to £1,196bn (2018: £1,015bn). External net flows were £86.4bn (2018: £42.6bn), 9.4% of opening external AUM, driven by a £37bn passive mandate and strong demand from a broad range of European customers. Revenues were up 8% to £912m (2018: £847m), supported by good growth in both external and internal business. Management fees increased by 8% to £889m (2018: £820m).

Operating profit increased by 4% to £423m (2018: £407m), reflecting increased revenues from flows and asset values which were partially offset by LGIM's continued investment in its growth strategy. LGIM is automating and simplifying the business through investment in data analytics, providing a digital experience for customers and optimising investment platforms. The cost income ratio (54%) reflects this continued investment in the business. Furthermore, a portion of LGIM-related project expenditure, currently reflected in Group expenses, will be allocated to the LGIM segmented results from 2020.

Workplace Savings assets increased by 34% to £40.3bn (2018: £30.0bn) driven by continued client wins and increased contributions. We are focused on improving efficiency as the business grows. We delivered 2019 operating profit of £2m. This profit relates to the administration business only, as the profits on the fund management services provided are included in LGIM's operating profit.

International net flows tripled to £59.2bn (2018: £19.6bn)

LGIM's international assets increased £112bn to £370bn. The performance was driven by a £37bn mandate with the Japan Government Pension Investment Fund, which provides a long term foundation for future growth in Japan and the broader region. Total flows from Asia including Japan were £39.7bn (2018: £3.0bn) over the period. Our European (excluding UK) business performed well with net flows of £11.6bn (2018: -£1.2bn), reflecting the continued focus we have placed on the region. The US business delivered net flows of £8.0bn (USD $10.0bn; 2018: £11.0bn, USD $15.2bn) and has a strong pipeline for 2020. US net flows were reduced relative to prior year due to higher outflows caused by DB clients insuring their plans with other PRT providers.

£7.3bn net flows from DC business

The defined contribution (DC) business continued to grow rapidly with total net inflows of £7.3bn (2018: £8.4bn), driven by the Workplace Savings business which provides administration and investment services to DC pension plans. Total UK DC AUM increased by 33% to £94.3bn (2018: £70.8bn). LGIM has experienced a 14% increase in customers on its Workplace pension platform, with the number of members now at 3.5m. LGIM also has one of the largest and fastest-growing UK Master Trusts, which recently reached £8.9bn in assets under management, reflecting the continued appeal of the structure for DC plans wishing to outsource their governance, investment and administration. We have used technological innovation to better serve our DC customers, including launching a financial wellbeing platform to provide practical tools and information to help members feel financially confident about their retirement planning.

Accelerating growth in our retail business

The retail business experienced strong net flows of £4.0bn (2018: £2.8bn) despite challenging market conditions. There was strong demand for multi-asset and index products in 2019. Retail AUM, including Personal Investing, increased to £38.8bn (2018: £30.6bn) as we continued to develop our product range and client-service proposition in the UK and broaden our distribution strategy in Europe. LGIM was ranked second in both gross and net UK retail sales in 2019.[38]

The ETF business has further supported our European retail distribution plans with additional launches in core equities and thematic ETFs. Currently 70% of our ETF offering has experienced net inflows in 2019 and we rank in the top 10 for pan-European mutual funds and ETFs net flows.[39] We have continued to expand our range of funds and distribution capabilities in line with client demand, leading to strong H2 2019 net flows and growing ETF AUM by 35% to £3.1bn (2018: £2.3bn).

Leading in responsible investing

LGIM is building on its credentials as a responsible investor to lead the asset management industry in addressing the environmental and social challenges arising from a rapidly changing world. As at 31 December 2019, LGIM managed £150.5bn in responsible investment strategies explicitly linked to ESG criteria.

Embedded within our processes and decisions, LGIM is providing clients:

· Stewardship with impact: LGIM's stewardship team engaged with 493 companies and voted on 50,900 resolutions

· Active corporate engagement: LGIM established a Global Research and Engagement Platform last year, bringing together the best sector expertise across its investment management business

· Integration of ESG factors: To meet growing demand for responsible investment products, LGIM extended its industry-leading Future World fund range in 2019, while utilising its proprietary ESG scores across a broad range of strategies

LGIM is also demonstrating leadership by taking, and pushing for, decisive action on era-defining issues, such as addressing climate change. For example, LGIM is developing the modelling technology required to assess climate risk in asset portfolios. LGIM aims to offer its clients (including internal clients, like LGR) end-to-end climate solutions, including measuring and managing carbon exposure, identifying underlying climate risks and seeking temperature alignment. 

Breadth of investment management solutions

1. Please see disclosure 4.01 for further details.

Total AUM increased 18% to £1,196.2bn (2018: £1,015.5bn), with external net flows of £86.4bn (2018: £42.6bn) and rising asset values driving £181bn of AUM growth. Net flows were broad-based with the international business contributing £59.2bn and positive flows from all established UK channels. Flows were positive across most asset classes as customers benefitted from our diverse product range and broad investment capabilities.

We anticipate that LGIM will continue to benefit from global trends in retirement saving and structural shifts in demand in the asset management industry, including ESG strategies. The Legal & General Master Trust launched the Future World Multi-Asset Fund as a default option for members making it the first Master Trust to launch a multi-asset ESG fund as a default option.

Index external net flows were £37.7bn (2018: -£14.8bn net flows), as we secured a £37bn passive mandate and experienced strong demand from a broad range of European customers. We saw and expect a continuation of the structural trend of DB schemes de-risking resulting in a shift from index to LDI strategies. We are well positioned to capitalise on this continuing trend.

Active Strategies, formerly Global Fixed Income and Active Equities, delivered external net flows of £2.8bn (2018: £9.9bn).  The flows performance in 2019 reflects outflows from US clients seeking pension risk transfers solutions. This effect was offset by new mandates in the Gulf and Japan.

Solutions external net flows were £38.1bn (2018: £40.2bn), driven by DB pension schemes implementing a broad range of liability driven investment (LDI) strategies as customers manage their risk positions more proactively.

Multi-asset strategies are in high demand from DC schemes and retail customers. External net flows into multi-asset funds were £7.7bn (2018: £7.4bn) of which £1.4bn relates to funds switching from Index as part of a review of the default investment offering for some Workplace Savings plans.

The Real Assets business has continued to expand, growing its AUM to £30.8bn (2018: £26.5bn). External flows have been affected by market sentiment and political uncertainty. The future growth of external flows will be supported by our build-to-rent business, which now has a pipeline of c.5,000 homes across the country, and our Private Credit business, which offers clients diversification of secure income and value protection solutions. The long term nature of the strategic relationships developed with LGR and LGC continue to be a positive source of funds.

Legal & General Capital

1. Includes short term liquid holdings.

Total operating profit up 13% to £363m

LGC operating profit was £363m, a 13% increase from the previous year (2018: £322m), driven by our diversified investment strategy and continued growth in the underlying direct investments portfolio. Overall the direct investment operating profit increased by 15% (2019: £217m, 2018: £188m). Operating profit from the traded investment and treasury portfolios increased by 9% to £146m (2018: £134m) with the equity portfolio growing to £1,797m (2018: £1,451m).

Profit before tax saw a significant increase to £454m (2018: £49m), reflecting strong improvements in equity markets in 2019 relative to 2018, slightly offset due to a reduction in the valuation of retail rental income from our Bracknell regeneration project.

Overall, the direct investment net portfolio return was down slightly to 5.2% (2018: 7.4%), reflecting continued new investment and a greater proportion of AUM in early stage development assets.

Direct investment portfolio grew 22% to £2.9bn

LGC's direct investment portfolio grew to £2,877m, an increase of 22% (2018: £2,359m). During the year we have added £0.5bn of diversified investments and a further £0.4bn of new commitments across Housing, Future Cities and SME Finance.

Strengthening and capitalising on our presence in the UK Housing sector, the Affordable Housing business performed exceptionally well, reaching profitability in its first year of operation, ahead of schedule and in the first full year of our 100% ownership of CALA, the CALA business has grown again in terms of homes delivered and profitability. Our Future Cities strategy continued to develop across its existing, maturing portfolio, and four new major council- or university-backed partnerships were announced during the year.

Our portfolio is well diversified across our business models, with:

· 48% invested in wholly-owned Legal & General operating businesses (2018: 47%), principally our investment in CALA;

· 33% in joint ventures or partnerships with other investors (2018: 31%), such as the MediaCityUK partnership with The Peel Group; and

· 19% in externally-managed funds (2018: 22%), including for example, our investments in Pemberton funds, where we are a significant shareholder.

Investing £930m in the future of UK cities (2018: £787m)

The challenges for UK urban areas are increasing. With the majority of the population now living in towns and cities and following decades of underinvestment, pressure has been placed on existing real estate, energy, transportation and social infrastructure. LGC's Future Cities business is addressing a shortage of investment and innovation in urban regeneration, clean energy and digital infrastructure. Together, these building blocks can have a multiplier effect to create the resilient urban centres of the future. Through these investments and our partnerships with universities, local governments, authorities and businesses, Legal & General is supporting the UK to develop great places to live and quality, world-class science and technology employment.

Our Future Cities' investments create real assets and support clean energy technologies which generate returns for shareholders, create attractive Matching Adjustment eligible assets for LGR, and supply desirable assets to LGIM clients. During 2019 our LGC Future Cities portfolio increased 18% to £930m (2018: £787m) through investment across all our target sectors.

In June LGC became a funding and development partner for Oxford University to develop homes for University staff and students, along with science and innovation districts in and around Oxford. This demonstrates LGC's ability to create assets for the wider Legal & General Group, which will provide funding of up to £4bn over the next ten years from its shareholder, annuity and LGIM-managed funds.

In November LGC committed £100m of funding for the Sunderland City Council's regeneration of the city and the construction of a new core business district. The project addresses twenty years of significant underinvestment, seeking to deliver three new commercial buildings, including the new city hall, and supporting the creation of up to 3,000 new jobs, while generating asset creation opportunities for LGR.

The Cardiff Central Square investment continues to mature. LGC provided the early-stage investment for the project in 2015 and as the project has matured LGC has created real assets for LGR and LGIM. As such, Legal & General's ownership of Cardiff Central Square is divided between the three divisions, with LGC owning 12%, LGR owning 64% and LGIM clients owning 24%. Additionally, in July 2019, LGC announced its investment in one of the final stages of its £400m Cardiff Central Square: a 500,000 sq ft project comprising the bus interchange, 100,000 sq ft of Grade A office space and 318 build-to-rent apartments for LGC's Housing business.

Sizeable investments were also made in digital infrastructure, through our investment in The Kao Data Campus, a state-of-the-art £230m data centre development servicing the London to Cambridge corridor, and clean energy, through our 23% stake in Pod Point, one of the UK's largest electric vehicle charge point operators.

Strengthening our UK Housing platform as assets increase to £1,483m (2018: £1,158m)

LGC has continued to expand its housing sector investments and capabilities, which are diversified across affordability, tenure and life-stage, meeting the UK's long term need for more homes across all demographics. During 2019 LGC's housing businesses sold or rented over 2,800 homes (2018: c.2,500).

LGC's Affordable Homes business was profitable in its first year of operation, ahead of schedule. During the year it delivered its first homes and is now generating investment opportunities for LGR. Partnering with fourteen established housing associations and providers to support its housing operations across the UK, it announced that it had secured a development pipeline of nearly 3,500 homes, representing a Gross Asset Value of around £750m, which it will deliver over the next two to three years. This is a strong start to LGC's target of delivering 3,000 affordable homes per year within its first four full years of operation in order to meet the UK's overwhelming need for more affordable homes.

LGC has extended its Later Living platform, adding a new rental offering to its suburban later living business, Inspired Villages Group, and establishing Guild Living, a developer and operator of urban later living communities. With an estimated 3.1m UK individuals aged over 55 actively seeking to downsize and only 7,000 retirement homes delivered per annum, there is a deep societal and economic need for investment in later living accommodation. Later Living aims to transform what the elderly can expect from later life by providing vibrant communities specifically built to activate retirement living - socially, physically, intellectually, and financially. 2019 was a successful year for the business, for example, Inspired Villages' combined sales and rental completions saw annual growth of 27% across its six operational sites during the period.

In our Build-to-Sell business, CALA increased revenues by 6% to £1.0bn, delivering nearly 2,500 homes across 91 active sites during the year, despite a challenging start to the year in the UK market. We believe our diversified housing platform makes us more resilient to temporary market slowdowns and we are well positioned to achieve our long‐term target of building over 3,000 build-to-sell units per annum as we continue to focus on further margin improvement within CALA.

In Legal & General's Build-to-Rent business, LGC has supported further developments across England, Scotland and Wales and completed its project in Bath. Across the Group, the build-to-rent business creates a pipeline of attractive, high quality assets for LGR and LGIM clients, with approximately 5,000 homes completed, in planning or under development, across fifteen schemes.

In our Modular Housing business, we are working with the Selby District Council and Bristol City Council to deliver over 180 new homes, with a focus on affordable homes.

SME Finance increased to £464m (2018: £414m)

We are developing and growing our alternative asset capabilities in order to enhance returns and create a portolio of assets which complement LGIM's portfolio and support LGR's growth both now and over the longer term. As part of this, we continue to support UK and European mid-market lending via fund investments with Pemberton. We also invest in start-up businesses across the UK and Europe through fund investments with Venture Capital managers and direct stakes in innovation and growth companies strategically aligned with our business.

In European SME financing, our 40% owned private credit manager Pemberton has accelerated the deployment of capital across all funds, with €3bn deployed across 30 deals in 2019. During the year Pemberton's total Funds Under Management grew to c.€6.1bn (2018: c.€4bn).

We continued to strengthen and diversify our well-performing Venture Capital fund portfolio through the addition of five new funds from leading European managers in 2019, bringing our total commitment to c.£140m across fifteen funds. In addition, we are also working with other industry participants on a solution that will democratise access to this exciting asset class for LGIM's Defined Contribution customers. 

Legal & General Insurance

1. Investment variance is driven by a fall in UK government bond yields and US Treasury yields which has resulted in a reduction in the discount rate used to calculate the reserves for both our UK and US protection liabilities.

Total operating profit of £314m

LGI operating profit increased 2% to £314m (2018: 308m), reflecting stable profit delivery in highly competitive UK markets, while the US Term protection business transitioned towards a more digital operating model.

LGI UK delivered operating profit of £223m (2018: £246m), reflecting changes in intra-group reinsurance resulting in c.£13m of profits shifting from the UK into the US. Historically we have reinsured part of our US protection risk to the UK, however we plan to continue to gradually reduce the intra-group reinsurance of LGIA into the UK in the coming years. Additionally, the 2018 results benefited from model changes. As in prior years, we reflected recent experience in our review of actuarial assumptions.

Net release from operations for LGI UK was broadly flat at £158m (2018: £159m), and included improved new business strain of £(7)m (2018: £(22)m) as a result of improving margins across the business. This was offset by a reduction in release from operations as a result of the recapture of intra-group reinsurance and prior year model and assumption changes, as well as an increase in Fintech's contribution.

UK Protection Solvency II new business margin increased to 7.6% (2018: 7.1%), reflecting product mix changes and continuous improvement in new business value despite competitive markets, particularly in H2. The protection business continues to generate Solvency II surplus immediately when written and provides diversification benefits to the Group, particularly LGR.

LGIA operating profit increased by $33m to $116m (2018: $83m). This includes reserve releases following assumption and model changes and the impact of the amendment to the reinsurance arrangement with the UK business, partially offset by adverse mortality, which was consistent with experience across the broader US life sector.

The annual dividend paid by LGIA to the Group in March 2019, shown in the accounts within LGIA net release from operations, increased by 2% (up 5% on a sterling basis) to $107m (2018: $105m).

Despite significant competition in the term market, US protection sales delivered a strong Solvency II new business margin of 11.1% (2018: 11.2%).

Profit before tax was impacted by a fall in government yields. LGI's negative investment variance of £234m was primarily driven by falls in UK and US government bond yields which have resulted in a reduction in the discount rate used to calculate the reserves. Our UK protection discount rate fell by 52 bps[40] and US 10 year Treasury yields fell by 74 bps[41].

Gross written premium up 6% in competitive markets

UK Retail Protection gross premium income increased 4% to £1,327m (2018: £1,279m) with new business annual premiums of £174m (2018: £175m). We remain the leading provider of retail protection in the UK, delivering straight through processing for more than 80% of our customers. In H2 we continued to see strong sales performance despite operating in a heavily competitive environment. Distribution through our bank partners benefited from our investments in these partnerships. We continued to innovate in the intermediary market with the launch of our rental protection proposition.

UK Group Protection gross premium income increased 5% to £345m (2018: £329m) with new business annual premiums of £76m (2018: £83m). The turnaround in Group Protection has now completed with the strong performance in 2019 reflecting improvements in service to our customers.

US Protection (LGIA) gross premium income increased 4% (up 9% on a sterling basis) to $1,349m (2018: $1,299m) with new business annual premiums of $113m (2018: $114m). Through the brokerage channel, LGIA is the largest provider of US term life assurance by number of policies, and second largest by new business APE.

Legal & General Mortgage Club had a record year facilitating £78bn of mortgages, up 7% (2018: £73bn), through strong partnerships with top lenders and an expanded service offering to more mortgage brokers following a period of digital investment. As the largest participant in the intermediated mortgage market in the UK, we are involved in nearly one in five of all UK mortgage transactions. Legal & General Surveying Services also delivered a strong performance, facilitating 550k surveys and valuations.

Fintech: Salary Finance expansion and mortgage market disruption

LGI has continued to grow its expertise in the Fintech sector focusing on disrupting markets adjacent to our life insurance business by building customer focused solutions and making targeted investments in start-up and scale-up opportunities.

Salary Finance continued its rapid expansion. In the UK, the financial wellbeing platform achieved a reach of 1.3m employees and its loan book doubled compared to the end of 2018. In the US, the platform has reached more than 130,000 employees within the first year of operation. The company is in a strong position to continue to grow its UK and US loan books through new, customer focused products launching in 2020.

We are making buying and financing a home easier and quicker for our customers and advisors through our technology investments, as detailed below.

Legal & General Mortgage Club brings together mortgage advisers and lenders. Through SmartrCriteria, the Mortgage Club's digital user-friendly criteria search system, we are helping 6,000 advisers select the best mortgage out of a universe of over 400,000 mortgage outcomes from over 80 lenders.

Legal & General Surveying Services performed over 27,000 digital valuations in 2019 compared to fewer than 4,000 in 2018 and has secured two new valuation deals with HSBC & Barclays. We launched a next-generation, digital home buyers survey and continue to invest in technology to innovate in the lender valuations market.

Disposed operations

In May 2019, Legal & General Group announced the sale of the General Insurance business to Allianz Holdings Plc. The transaction completed in December 2019, improving the Group's Solvency II coverage ratio by c.1%.

The Group announced the sale of the Mature Savings business to Swiss Re on 6 December 2017 for £650m. The proceeds were received by the Group at the start of January 2018. In 2019 we recognised £46m operating profit from the business, resulting from the unwind of the expected underlying profits. We expect to complete the associated Part VII transfer in H1 2020, upon which it is anticipated that an IFRS gain of circa £350m will be generated, which includes the unwind of the 2020 expected underlying profits and is in addition to profits recognised in 2018 and 2019, including the one-off provision release in 2018 (£125m total). The completion of the Part VII transfer is expected to be broadly neutral to the Group's Solvency II coverage ratio.

Subsidiary dividends to Group

1. Represents cash that will be remitted from subsidiaries to Group in respect of the year's financial performance.

2. Other includes Legal & General Home Financing, Legal & General Capital Investments Limited, Legal & General Reinsurance, Investment Discounts On-Line Limited, Legal & General Partnership Services Limited and Legal & General Surveying Services.

The level of subsidiary dividends are scheduled to cover external dividends (2019: £1,047m; 2018: £978m), Group related costs, and investment in our businesses, with excess liquidity being held within our regulated subsidiaries.

Borrowings

The Group's outstanding core borrowings totalled £4.1bn at 31 December 2019 (2018: £3.9bn). There is also a further £1.0bn (2018: £1.0bn) of operational borrowings including £0.8bn (2018: £0.6bn) of non-recourse borrowings.

In November 2019 the Group issued £600m of Tier 2 subordinated debt with a coupon of 3.75%.

Group debt costs of £208m (2018: £203m) reflect an average cost of debt of 5.0% per annum (2018: 5.1% per annum) on an average nominal value of debt balances of £4.1bn (2018: £4.0bn).

Taxation

The effective tax rate reflects changes to the structuring of our internal reinsurance arrangements for capital management reasons and the interplay with our global reinsurance hub. 

Solvency II

As at 31 December 2019, the Group had an estimated Solvency II surplus of £7.3bn over its Solvency Capital Requirement, corresponding to a Solvency II coverage ratio of 184% on a shareholder basis. As at 28 February 2020, we estimate the ratio was 174%.[43]

1. Solvency II position on a shareholder basis is adjusted for the Own Funds and SCR of the With-profits fund and the Group final salary pension schemes, and is before the accrual of the relevant dividend.

Operational surplus generation was up 9%[44] to £1.6bn (2018: £1.4bn), after allowing for amortisation of the opening Transitional Measures on Technical Provisions (TMTP) and release of Risk Margin.

New business strain was £0.6bn, reflecting significant UK PRT volumes written at a capital strain of less than 4%. This resulted in net surplus generation of £1.0bn (2018: £0.9bn).

Operating variances include the impact of experience variances, changes to model calibrations, and management actions. The net impact of operating variances over the period was £0.3bn. Market movements of £(0.2)bn reflect the impact of lower rates on the valuation of our balance sheet, partially offset by higher asset markets, predominantly in equities, as well as a number of other, smaller variances.

The movements shown above incorporate changes to the Internal Model and Matching Adjustment during 2019 and the impacts of a recalculation of the TMTP as at end December 2019. The recalculated TMTP of £5.7bn (31 December 2018: £5.2bn) is net of amortisation to 31 December 2019.

When stated on a proforma basis, including the SCR attributable to our With-profits fund and the Group final salary pension schemes in both the Group's Own Funds and the SCR, the Group's coverage ratio was 179% (2018: 181%).

Reconciliation of IFRS net release from operations to Solvency II net surplus generation1

The table below gives a reconciliation of the Group's IFRS Release from operations and Solvency II Operational surplus generation in 2019:

The table below gives a reconciliation of the Group's IFRS New business surplus to Solvency II New business strain in 2019:

1. Please see disclosure 5.01 (e) for further details.

Sensitivity analysis1

1. Please see disclosure 5.01 (g) for further details .

The above sensitivity analysis does not reflect all possible management actions which could be taken to reduce the impacts of each sensitivity due to the complex nature of the modelling. In practice, the Group actively manages its asset and liability positions to respond to market movements. Other than in the interest rate stresses, we have not allowed for the recalculation of TMTP. The impacts of these stresses are not linear therefore these results should not be used to interpolate or extrapolate the impact of a smaller or larger stress.

The results of these tests are indicative of the market conditions prevailing at the balance sheet date. The results would be different if performed at an alternative reporting date.

The impacts of credit spread and risk free rate sensitivities are primarily non-economic arising from movement in balance sheet items that result from changes in the discount rates used to calculate the value of assets and liabilities. The credit migration stress, in the absence of defaults, delays the emergence of operating surplus generation, but does not reduce the actual quantum of future releases. Similarly equity and property stresses only result in losses if assets are sold at depressed values. 

Solvency II new business contribution

Management estimates of the present value of new business (PVNBP) and the margin as at 31 December 2019 are shown below1:

The key economic assumptions as at 31 December 2019 are as follows:

1. Please see disclosure 5.02 for further details.

The future earnings are discounted using duration-based discount rates, which is the sum of a duration-based risk free rate and a flat Margin for Risk. The risk free rates have been based on a swap curve net of the EIOPA-specified Credit Risk Adjustment. The risk free rate shown above is a weighted average based on the projected cash flows.

Other than updating for recent experience, all other economic and non-economic assumptions and methodologies that would have a material impact on the margin for these contracts are unchanged from those previously used by the group for its European Embedded Value reporting, other than the cost of currency hedging which has been updated to reflect current market conditions and hedging activity in light of Solvency II.

Principal risks and uncertainties

Legal & General runs a portfolio of risk taking businesses; we accept risk in the normal course of business and aim to deliver sustainable returns on risk based capital to our investors in excess of our cost of capital. We manage the portfolio of risk that we accept to build a sustainable franchise for the interests of all our stakeholders; we do not aim to eliminate that risk. We have an appetite for risks that we understand deeply and are rewarded for, and which are consistent with delivery of our strategic objectives. Risk management is embedded within the business. The Group's Principal Risks and Uncertainties summarise key matters that may impact the delivery of Group's strategy earnings or profitability.

Notes

A copy of this announcement can be found in "Results, Reports and Presentations", under the "Investors" section of our shareholder website at www.legalandgeneralgroup.com/investors/results-reports-and-presentations/ 

A presentation to analysts and fund managers will take place at 9:30am UK time today at One Coleman Street, London, EC2R 5AA.

There will be a live webcast of the presentation which can be accessed at www.legalandgeneralgroup.com/investors/preliminary-results-2019. A replay will be available on this website later today.

Definitions

Definitions are included in the Glossary on pages 85 to 89 of this release.

Forward looking statements

This announcement may contain certain forward-looking statements relating to Legal & General, its plans and its current goals and expectations relating to future financial condition, performance and results. By their nature, forward-looking statements involve uncertainty because they relate to future events and circumstances which are beyond Legal & General's control, including, among others, UK domestic and global economic and business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory and Governmental authorities, the impact of competition, the timing impact of these events and other uncertainties of future acquisitions or combinations within relevant industries. As a result, Legal & General's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in these forward-looking statements and persons reading this announcement should not place reliance on forward-looking statements. These forward-looking statements are made only as at the date on which such statements are made and Legal & General Group Plc does not undertake to update forward-looking statements contained in this announcement or any other forward-looking statement it may make.

Going concern statement

The Group's business activities, together with the factors likely to affect its future development, performance and position in the current economic climate are set out in this Preliminary Management Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Group Results. Principal risks and uncertainties are detailed on pages 24 to 26. In addition, the financial statements include, amongst other things, notes on the Group's objectives, policies and process for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities, and its exposures to credit and liquidity risk.

The Group manages and monitors its capital with various stresses built in order to understand the expected impact of market downturns. These stresses do not give rise to any material uncertainties over the ability of the Group to continue as a going concern and therefore, based upon the available information, the directors consider that the Group has the plans and resources to manage its business risks successfully as it has a diverse range of business and remains financially strong.

Having reassessed the principal risks, the directors considered it appropriate to adopt the going concern basis of accounting in preparing the preliminary financial information.

Directors' responsibility statement

We confirm to the best of our knowledge that:

i. The group financial statements within the full Annual Report and Accounts, from which the financial information within this preliminary announcement has been extracted, and which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the group;

ii. The preliminary announcement includes a fair review of the development, performance and position of the group, as well as the principle risks and uncertainties faced by the group; and

iii. The directors of Legal & General Group Plc are listed in the Legal & General Group Plc website: www.legalandgeneralgroup.com/about-us/our-management/group-board/.

By order of the Board

Nigel Wilson Stuart Jeffrey Davies

Group Chief Executive Group Chief Financial Officer

4 March 2020 4 March 2020  

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Notes