Legal & General Regulatory News (LGEN)

H1 2023 Results: £0.95bn of operating profit and capital generation, stock of deferred profits up to £13.8bn, DPS up 5% to 5.71p and SII ratio of 230%

Resilient financial performance1

· Operating profit of £941m (H1 2022: £958m)

· Solvency II coverage ratio2 of 230%, with surplus of £9.2bn (H1 2022: 212%)

· Solvency II operational surplus generation of £947m (H1 2022: £946m)

· Profit after tax3 of £316m (H1 2022: £575m)

· Interim dividend of 5.71p, up 5% (H1 2022: 5.44p)

£947m capital generation with significant dividend headroom4

· We are on track to achieve our five-year (2020-2024) ambitions. To date:

‒ Capital generation of £5.9bn (£8.0-9.0bn by 2024)

‒ Dividends of £3.6bn (£5.6-5.9bn by 2024)

‒ Net surplus generation over dividends of £0.6bn5

· The Board's intention is to continue to grow the dividend at 5% per annum to FY246

Stock of deferred profits up to £13.8bn as new business outpaces backbook release7

· New business deferred profits of £0.6bn

‒ LGRI premiums of £5.0bn (H1 2022: £4.4bn) generating deferred profit of £0.4bn8

‒ In H2, LGRI has already written a further £1.8bn UK and $1.0bn US PRT

"We remain on track to achieve our five-year ambitions and deliver attractive returns for our shareholders. In H1, we delivered £0.95bn of both IFRS operating profit and capital generation, together with a Solvency II ratio of 230% and a surplus of £9.2bn. The dividend is up by 5%. LGRI and LGC performed strongly, LGIM results stabilised, and Retail's performance - while impacted by competition in some areas - was bolstered by growing annuity sales and progress in US protection. We wrote £4.9bn of UK PRT, deploying just £106m of capital, underlining the benefits of our synergistic business model. I'd like to thank my colleagues for their contribution and ongoing commitment to inclusive capitalism, serving our shareholders, customers and wider society."

Sir Nigel Wilson, Group Chief Executive

Financial summary

1. Operating profit is an Alternative Performance Measure and represents Adjusted operating profit as defined on page 102.

2. Profit before tax attributable to equity holders is an Alternative Performance Measure and represents Adjusted profit before tax attributable to equity holders as defined on page 103.

3. CSM (gross of tax, net of reinsurance) includes the new business CSM uplift associated with the L&G pension schemes' partial buy-in transaction in H1. In H2 we expect to move to a full buy-out of the pension schemes.

4. This does not reflect the anticipated reduction in the Risk Margin (part of planned reforms to the Solvency regime) which is estimated to reduce H1 New business strain by £55-60m.

H1 2023 Financial performance

Income statement

Year to date operating performance is resilient with H1 2023 operating profit from divisions of £1,139m (H1 2022: £1,153m). All four of our divisions remain well-positioned to continue to execute on compelling structural market opportunities to deliver further profitable growth over the medium and long-term.

LGRI operating profit increased by 19% to £471m (H1 2022: £395m) underpinned by the growing scale of backbook earnings and the consistent investment performance of our annuity portfolio. LGRI executed higher new business volumes to address growing demand while maintaining pricing discipline, writing £4,992m of global PRT (H1 2022: £4,449m) at a Solvency II new business margin (8.0%)[9] in line with our long-term average. H2 has started well, with £1.8bn of UK PRT and $1.0bn of US PRT completed to date.

Retail delivered operating profit of £230m (H1 2022: £295m). Whilst insurance operating profit is up 4% (H1 2023: £243m, H1 2022: £234m), driven by resilient ongoing profit releases in the UK and US, total operating profit is down given the lower contribution from Fintech, as valuation uplifts from H1 2022 did not repeat. The Retail Retirement business again delivered good new business volumes, and we continue to focus on disciplined pricing to ensure attractive shareholder returns.

LGC operating profit increased by 13% to £296m (H1 2022: £263m) driven by our alternative asset portfolio, where operating profit increased to £230m (H1 2022: £202m). Our Alternative Finance business, led by Pemberton, continues to perform strongly, and in our Specialist Commercial Real Estate portfolio, our targeted investments in infrastructure and science & technology-focussed assets proved more resilient than the general commercial property market. Our diversified, multi-tenure housing portfolio also remained resilient with Cala, our largest housing business, continuing to perform well in the face of a challenging market.

LGIM delivered operating profit of £142m (H1 2022: £200m) primarily reflecting the impact of rising interest rates on assets under management, which decreased by £132bn to £1,158bn (H1 2022: £1,290bn). Despite significant inflationary impacts, we have taken action to keep absolute costs flat on an FX-adjusted basis. 

Profit before tax attributable to equity holders[10] was £324m (H1 2022: £697m), reflecting investment variance of £(617)m (H1 2022: £(261)m). H1 2023 investment variance was driven by the unrealised mark to market impact of higher rates on our portfolio, the cost relating to our announced Modular Homes closure and the write-down of our investment in Onto.

Balance sheet and asset portfolio

Group's Solvency II operational surplus generation (OSG) was level at £947m (H1 2022: £946m) despite rising interest rates which reduced SCR releases. Net surplus generation (NSG) was £752m (H1 2022: £825m).  We operate a capital light PRT business: in H1 2023, PRT capital strain was just over 2%.  New business strain does not include risk margin reforms, which have an estimated H1 benefit of £55-60m for PRT and Individual annuities combined. We have scope to write up to £11bn of UK PRT volumes and for the UK annuity portfolio to be self-sustaining again in 2023, as it has been for the last three years.

The Group reported a Solvency II coverage ratio[11] of 230% at H1 2023 (FY 2022: 236%, H1 2022: 212%), slightly ahead of our recent disclosure[12] (c225%) which reflected some degree of prudence as we continue to optimise our asset liability management.

Our IFRS return on equity of 13.0% (H1 2022: 22.8%) reflects the unrealised mark to market impact of investment and other variances on the total result.[13] Looking at the result before investment variance, return on equity would be 37.1% (H1 2022: 31.4%). We expect investment variance to average to zero over the longer term.[14]

Our stock of deferred profit increased 3% to £13.8bn (H1 2022: £13.4bn), with CSM up 7% to £12.4bn, reflecting contributions from our growing annuity businesses and routine longevity updates in H2 2022, partially offset by the Risk Adjustment (£1.5bn) reducing from H1 2022 (£1.9bn) as a result of rising interest rates.[15]

Our diversified, actively managed annuity portfolio has continued to perform resiliently.  In H1 2023 our annuity portfolio experienced no downgrades to sub-investment grade and more upgrades than downgrades. There were no material property or credit write downs.  The annuity portfolio's direct investments have received 100% of scheduled cash-flows year to date, reflecting the high quality of our counterparty exposure.

Group Strategy

Legal & General has established expertise in asset origination (LGC) and asset management (LGIM), and in the provision of retirement and protection solutions to corporates and individuals (LGRI and Retail). We operate at scale and are strongly positioned to capitalise on significant growth opportunities across our chosen markets through our four divisions:

A powerful business model

We have a unique and highly synergistic business model, which continues to drive a strong return on equity. Legal & General provides powerful asset origination and management capabilities directly to clients. These capabilities also underpin our leading retirement and protection solutions:

· LGRI is a market leader in UK PRT and a top ten player in the US PRT market, with annuity assets of £55.5bn.[17] It provides long-term captive AUM to LGIM, and the annuity portfolio is continually enhanced through the supply of alternative assets originated by LGC. 

· Retail is a leading provider of UK retail retirement and protection solutions, and US term life insurance. The UK retail retirement product offerings include workplace savings, annuities, income drawdown and lifetime mortgages (LTM). Workplace savings benefits from LGIM's existing DC relationships and distribution team to win new schemes and the retail annuity business provides captive AUM to LGIM Retail is also an internal centre of excellence in technology, and manages a portfolio of complementary Fintech investments.

· LGC invests across four main asset classes (Specialist Commercial Real Estate, Clean Energy, Housing and Alternative Finance) to generate attractive risk-adjusted shareholder returns and to create alternative assets to (i) back our annuity portfolios in LGRI and Retail and (ii) meet the growing third-party demand for alternative assets. LGC is increasingly attracting third-party capital either directly through existing investments, or through collaboration with LGIM.

· LGIM is a leading global asset manager, ranking 11th in the world[18] with £1.2tn of AUM of which £457bn, or 39%, are international assets[19]. LGIM is a leading provider of UK and US Defined Benefit (DB) de-risking solutions. It is uniquely positioned to support DB clients across the full range of pension 'Endgame' destinations, including PRT with LGRI.  81% of LGRI's PRT transactions over the past three years were from existing LGIM clients.[20] LGIM is also the market leader in UK Defined Contribution (DC) pension scheme clients with DC AUM of £146bn - a market with significant growth potential, with total UK DC assets expected to surpass £1.2tn by 2031.[21]

The synergies within and across our businesses drive profits and fuel future growth. 

The integrated nature of our business model means we have relationships with clients and customers that can and do last for decades. A corporate client in LGIM has historically become a PRT client after 14 years, however this is now expected to accelerate due to improved funding levels. We are working with LGIM clients to reconfigure their portfolios to lock in any funding gains that have been made, by better matching to a typical insurance pricing portfolio and to position the assets to be more easily transferred as part of a buy-in or buyout transaction. Once moved to PRT, LGRI will then typically have a relationship with that client for another 30 to 40 years. Similarly, Retail Retirement and LGIM may have a 30-40 year relationship with a customer during the DC accumulation phase, and then extend that relationship for another 15-30 years during the decumulation phase across a suite of decumulation products including individual annuities, lifetime mortgages and drawdowns.

The Group continues to build out, in a measured fashion, its international franchise. We have made excellent progress in the US over the last decade and will continue to grow all four divisions in that market. LGIM continues to make good progress against its international expansion plans in the US, Europe and Asia. Kerrigan Procter continues to coordinate the Group's expansion plans in Asia building on the $167bn of regional assets already under management (FY 2022: $150bn).

A long-term commitment to Sustainability and Inclusive Capitalism

Our purpose is to improve the lives of our customers, create value for our shareholders and to build a better society for our customers, our shareholders, and our communities. This inspires us to invest our assets in an economically, environmentally and socially useful way to benefit society for the long-term - what we call Inclusive Capitalism. We believe investing in fundamental pillars of society will enable strong shareholder returns and improve the lives of our customers.

Our philosophy underpins our approach to sustainability.[22] We think about sustainability in terms of:

1. How we invest proprietary assets.[23]  Our ambition is to reduce our group investment portfolio economic carbon intensity by half by 2030 and to net zero carbon by 2050. In 2022, our group investment portfolio economic carbon intensity fell by 5% versus 2021, through a combination of market movements, partially offset by a muted emissions increase as business activity increased. While the reduction of 23% from 2019 is ahead of our 2022 target, we may still see further volatility from future global events - as experienced through the pandemic and the ongoing conflict in Ukraine - and therefore remain focused on delivery of our mid-to-long-term decarbonisation targets. We continue to make environmentally and socially useful investments. As at H1 2023, we have invested £1.4bn in clean energy and £8.7bn in social infrastructure.  For more information, please see our latest Climate Report, compliant with recommendations by the Task Force on Climate-related Financial Disclosures (TCFD), and our latest Social Impact Report, which describes our activity in investing for positive social, economic and health outcomes.[24]

2. How we influence as one of the world's largest asset managers with £1.2 trillion AUM. We have £331.6bn AUM in ESG strategies, and in H1 2023, our investment stewardship team engaged with around 630 companies, holding them to account on the issues that matter most to our clients.[25],[26] In June 2023, we reported on the latest cycle of our Climate Impact Pledge engagement programme, which we have expanded to include a quantitative assessment of over 5,000 companies across 20 climate-critical sectors, alongside in-depth engagement with around 100 'dial mover' companies. LGIM is proud to have received a 5 star ranking from the UN Principles for Responsible Investment (UN PRI) for investment stewardship and policy, and to have scored over 75% in each section of the latest UN PRI report.[27] In addition to being among the highest rated managers for engagement by FinanceMap, LGIM has also been highlighted by MajorityAction for its approach to holding companies to account on climate change.

3. How our businesses operate. We are committed to supporting our customers, employees, suppliers, shareholders and society at large. In the current economic environment, we recognise that support is more critical now than ever. For information on how we are supporting our stakeholders, please see our Social Impact report.14 We have committed to reducing the carbon emission intensity of our operating businesses. Our ambition is to operate our offices and business travel with net zero emissions from 2030, and for all our new homes to be net zero operational carbon from 2030. ESG criteria are included in executives' objectives and remuneration schemes.

CEO succession plans

In June, we were pleased to announce António Simões as the Group's next Chief Executive Officer, subject to regulatory approval.

António will join from Banco Santander where he has been Regional Head of Europe since September 2020. In this role, he leads Santander's businesses in the UK, Spain, Portugal and Poland, working across retail and commercial banking, corporate and investment banking, wealth management and insurance. Prior to joining Santander, António spent 13 years at HSBC, including as CEO of UK and Europe, and latterly CEO of Global Private Banking, based in London and Hong Kong. He is a former McKinsey & Company partner.

António's appointment follows a rigorous, global, selection process managed by Sir John Kingman, Group Chair. He will succeed Sir Nigel Wilson as Group CEO. Sir Nigel has been Group CEO of Legal & General since 2012, and in January announced his intention to retire from executive life.

Since Sir Nigel joined Legal & General, the Group has delivered a consistently strong financial performance with a total shareholder return of over 600% driven by significant growth in dividends, earnings per share and ROE. During his time as Chief Executive, Sir Nigel has executed numerous strategic initiatives to grow and re-focus the business, consistently exceeding financial and operational targets while also ensuring Legal & General has delivered Inclusive Capitalism with positive outcomes for shareholders, customers and the broader economy.

António will take up his new post formally on 1 January 2024. Sir Nigel will remain as Chief Executive in the meantime, continuing to focus on delivering the strategy of the Group. Sir Nigel will work closely with António to ensure a comprehensive handover and a smooth transition. António will join the Board of Legal & General Group plc on appointment, at which point Sir Nigel will step down from the Board.

Outlook

Confident in achieving our ambitions; well-positioned to deliver long-term profitable growth

Our strategy has delivered strong compounding returns for our shareholders over time. It has demonstrated resilience and positions us well to navigate - and even benefit from - the prevailing market environment. We are confident we can continue to deliver profitable growth as we execute on our strategy. 

We set out five-year ambitions at our Capital Markets event in November 2020. Cumulatively, over the period 2020-2024, our financial ambitions[28] are for:

· Capital generation (of £8.0bn - £9.0bn) significantly to exceed dividends (of £5.6bn - £5.9bn)[29]

· Earnings per share to grow faster than dividends, with the dividend growing at 5% per annum to FY 2024[30]

· Net capital surplus generation (i.e., including new business strain) to exceed dividends

We made further progress against these ambitions in H1 2023 and remain confident in achieving them.  In H1 2023, we achieved £947m in capital generation (H1 2022: £946m), and from the start of the ambition period to H1 2023, we have now achieved £5.9bn of cumulative capital generation while declaring dividends of £3.6bn.

We remain highly confident in our strategy and in our ability to deliver resilient, organic growth, supported by our strong competitive positioning in attractive and growing markets. Our confidence in our dividend paying capacity is underpinned by the Group's strong earnings and strong balance sheet, which has Solvency II surplus regulatory capital of £9.2bn over a capital requirement of £7.0bn.

Business segment outlook

Legal & General Institutional Retirement (LGRI)

LGRI participates actively in the global pension risk transfer (PRT) market, focusing on corporate defined benefit (DB) pension plans in the UK, the US, Canada, Ireland and the Netherlands, which together have more than £6 trillion of pension liabilities.

We write direct business in both the UK and US and are top-tier providers in both markets. We are supported by LGIM's long-standing client relationships, investment sourcing and asset management capabilities as well as LGC's asset origination capabilities and Retail's lifetime mortgage origination. 

The UK is our primary market and is the most mature PRT market globally with £1.4 trillion of UK DB pension liabilities, of which an estimated c15% has been transferred to insurance companies to date.[31] The addressable market therefore remains significant and demand for PRT is growing as rising interest rates and widening credit spreads reduce pension deficits and allow more funds to consider de-risking options. 

Our stated ambition is to write circa £8-10bn of UK PRT per annum and we are confident of achieving this. We have demonstrated that this level of new business is self-sustaining, i.e. the growing amount of capital generated by our in-force UK annuity book more than offsets both the capital investment required to fund new business and the portfolio's contribution to our progressive Group dividend. 

The UK annuity portfolio achieved self-sustainability in 2020, 2021 and 2022. Over the period from the beginning of 2020 to H1 2023, Group net surplus generation has exceeded dividends by a total of £0.6bn. For 2023 as a whole, we currently have capacity to write up to £11bn of UK PRT and still achieve self-sustainability for the UK annuity portfolio.

The US represents another significant market opportunity, with $3.2 trillion of DB liabilities, of which an estimated c11% have transacted to date.[32] Since our market entry in 2015, our US business has completed 96 transactions and written $8.6bn of business. 

Canada is a market that has potential and where we have seen a growing acceleration of pension schemes looking to de-risk. The market is estimated to have CAD $1.8tn of DB liabilities with only c10% of $0.5 trillion private sector DB liabilities having transacted to date.[33] Since our market entry in 2019, we have written CAD $1.2bn of liabilities through our reinsurance entity, L&G Re.

In the Netherlands, pension reform legislation could result in significant PRT business coming to market over the next 3-4 years. With pension liabilities of over €1 trillion[34], we continue to actively monitor this market and have announced plans to enter into a long-term strategic relationship with Lifetri in order to participate, should attractive opportunities arise.

Our ambition is to write at least $10bn of international PRT over the five years from 2020-2024. We have written $5.7bn of International PRT from 2020 through H1 2023, and we have written $1.0bn so far in H2. There remains significant opportunity in these markets and we are well-positioned to continue to execute where the margins justify.

Legal & General Retail Division (Retail)

Across all our Retail businesses, we continue to focus on our customers, with a particular focus on the technology that supports providing a more efficient and more personalised service.

Insurance

We leverage our technological innovation, operational strength and scale efficiencies to offer market leading product offerings.

Our data and tech-led strategy makes our products more accessible to customers and supports further product and pricing enhancements. Our retail protection business is supported by our strong distribution relationships, investment in our systems and platforms, and product enhancements. 

We expect the retail protection market to continue to be impacted by a softer housing market and by affordability considerations for consumers. Our medium-term ambition remains unchanged. We continue to target mid-single digit growth in revenues across our UK protection businesses to 2025. 

In the US, we anticipate our ongoing technology investments and new partnerships will position us for premium growth. We are already the largest provider of term life assurance in the independent channel[35] and number three in overall US market share1, and our digital first approach is aiming to achieve, on average, double digit growth in new business sales to 2025.

Retirement

Workplace savings is a core part of the Group's proposition. The business is a growth area for the Group, and we expect the market to continue to expand, driven by ageing demographics and welfare reforms. Our core focus is on better assisting our 5.0 million Workplace members to plan for their retirement whilst they are saving with us, as well as when they come to retirement. 

There are currently c£600bn in UK Defined Contribution (DC) accumulation assets (of which LGIM manage £146bn including those administrated by Workplace Savings), and this is expected to more than double over the next ten years.[36] As a market leading provider in Workplace Savings, we are well placed to benefit from this expected increase in DC pension assets, and to grow administration revenues for the Retail division and fund management revenues for LGIM.

The 'at retirement' market is growing with the amount of DC assets at retirement now reaching c£45.6bn per year. The individual annuity market is continuing to perform well as interest rate rises make the cost of an annuity more attractive.  Retail Retirement has a strong market share in individual annuities - 15.4% over Q1 2023[37] and an external market share of 20.4%27 .

The UK lifetime mortgage (LTM) market continues to represent a sizeable long-term opportunity, with UK housing equity in over 55s at £4.4 trillion.[38] Higher interest rates have reduced the attractiveness of LTM's compared to last year, and we continue to remain disciplined on pricing to deliver assets that add value to our portfolio.

Fintech

We've been making strategic investments in adjacent market Fintechs for many years. Despite headwinds from current economic conditions, the majority of our investment portfolio remains resilient, and we expect attractive new opportunities to invest to arise. We are targeting double digit growth to 2025 for our Fintech businesses.

Legal & General Capital (LGC)

LGC, the Group's alternative asset origination platform, will continue to deploy shareholder capital in a range of underserved areas of the real economy which are backed by long-term structural trends. LGC has three fundamental objectives: 1) profit and value generation within LGC for shareholders; 2) asset creation to back LGRI and Retail annuity liabilities and to meet demand from like-minded investors; and 3) a focus on high-return sustainability and impact-focused investments, securing long lasting value for shareholders, customers and society.

As previously communicated, our ambition is to build LGC's diversified alternative AUM to c£5bn by 2025 (H1 2023: £4.2bn), with a blended portfolio return target of 10-12%. In combination with the contribution from the Traded Portfolio, LGC's ambition is to deliver operating profit of £600-700m in 2025. Additionally, we plan to increase third party capital to £25-30bn (H1 2023: £16.8bn).

LGC's asset classes, which include Specialist Commercial Real Estate, Clean Energy, Housing, and Alternative Finance, have all been selected given their long-term need for capital. They offer compelling opportunities to attract third party capital and meet the needs of co-investors and internal capital sources. 

We expect our existing platforms such as Pemberton and NTR to underpin our ambitions for third party AUM, building on their impressive growth to-date, but our newer platforms such as Ancora, ImpactA and Affordable Homes have the capability to accelerate this in future. 

· We are investing into the Specialist Commercial Real Estate (SCRE) of the future in the UK and US, including laboratory and real estate developments for the life sciences and technology sectors, and mixed-use regeneration of towns and cities. These investments include significant funding from LGRI. Our SCRE portfolio also includes an increasing focus on Digital Infrastructure, which is critical for both corporations and governments. Data management is one of the fastest growing sectors from a structural perspective, and our state-of-the-art data centres are central to meeting this increase in demand. 

· In the Clean Energy sector, we are focused on investing selectively into attractive growth equity and clean energy infrastructure opportunities. We are confident that our selective approach to investing will continue to yield positive results.

· LGC's significant Housing platform continues to expand, and make further acquisitions across its broad tenure mix, including build to sell, build to rent, social housing, shared ownership and later living. We are well positioned to scale this platform further, in support of our long-term ambitions. Whilst 2023 presents a more challenging outlook for the sector, our multi-tenure, need-driven and diversified approach continues to provide opportunities and we will continue to invest thoughtfully through the cycle.

· In Alternative Finance, we are continuing to support UK and European innovation through two key areas. Firstly, through our growing GP Investing platform, where we continue to work alongside ambitious, impact-oriented alternative asset managers, and secondly, through our Venture Capital business, where we continue to invest in the real economy and technological innovation.

Our alternative asset strategies represent Inclusive Capitalism at work - generating long-term value for shareholders and society. 

Legal & General Investment Management (LGIM)

LGIM is a global asset manager with a diversified asset and client base, underpinned by clear demand for our solutions-oriented approach. As the asset manager for L&G, LGIM has structural advantages and plays a core part in delivering the Group's successful synergistic business model, including creating a pipeline of fully funded DB pension schemes for LGRI; the origination and management of assets for the annuity portfolio and access to third-party clients for LGC's alternative asset creation platform.

LGIM has grown organically to be one of the largest managers of corporate pension funds globally. We are a UK leader in Defined Benefit (DB) pensions, the UK's number-one Defined Contribution (DC) manager, consistently rank in the top 4 in UK Wholesale[39] and manage assets for many of the largest corporate pension schemes in the US. Our strategy is to maintain our strong position in the UK while deliberately broadening our reach internationally.

2022 was a profoundly challenging year for all asset managers given the market environment. We have seen a partial recovery in global equity markets in the first half of 2023, however, this has been offset by further rises in interest rates and inflation remains high in many developed economies. 

Asset management is a long-term business, and we remain confident in our strategy which positions LGIM for sustainable future growth. Our medium-term ambition is underpinned by the three strategic pillars, to modernise, diversify and internationalise:

Modernise: We are evolving the business, investing in our people, our platform and our data capabilities to improve operating effectiveness and deliver scale benefits. We are transforming our operating model, using State Street/Charles River to build a global investment and middle office platform. In H1 2023, we transferred 172 employees to State Street in advance of completing the first phase of delivery.

Diversify: We are building on our core capabilities to improve business mix, by selectively adding to our investment offering, with a focus on higher-margin areas such as private markets and active fixed income. To meet client objectives, we are increasingly integrating ESG into our investment portfolios with around 88% of new pooled products developed for clients in 2023 being ESG-related. 

Internationalise: LGIM aims to be an innovator in regions and countries where our strengths align to client needs. Since 2018, LGIM's International AUM has grown by 78%, $581bn (£457bn) - 39% of LGIM's total AUM. Our ambition is to continue growing International AUM profitably and at pace in the US, Europe and Asia.

Our approach to capital allocation

The Board believes it has considerable opportunities available to deliver attractive returns to shareholders by retaining and investing capital within the Group.

The Board will at the same time continually assess these investment opportunities against the relative attractiveness of returning capital to shareholders either through a buyback or a programme of buybacks. 

If at any point the Board believes that capital would be best deployed in this way, or if the Board believed it had surplus capital, it would not hesitate to return capital to shareholders. Any incremental capital investment could also, over time, increase the likelihood of these returns to shareholders.

Dividend

The Group's dividend policy states: "We are a long-term business and set our dividend annually, according to agreed principles. The Board's intention for the future is to maintain its progressive dividend policy, reflecting the Group's expected medium-term underlying business growth, including measurement of Capital generation and Adjusted operating profit."

The Board adopts a formulaic approach to the interim dividend which grows by the same percentage as the total dividend for the prior year.

Consistent with our stated ambition to grow the dividend at 5% per annum to FY 2024, the Board has declared an interim dividend of 5.71p, up 5% from the prior year (5.44p). 

LGR - Institutional

1. This is the first time we are reporting under IFRS 17. Comparatives have been restated accordingly. For further information please see Note 2.01.

2. Includes the new business CSM/RA uplift associated with the L&G pension schemes' partial buy-in transaction in H1. In H2 we expect to move to a full buy-out of the pension schemes.

3. In the UK, annuity assets across LGRI and Retail are managed together. We show here LGRI estimated annuity assets.

Operating profit of £471m

LGRI continues to deliver strong operating profit of £471m, up 19% (H1 2022: £395m). 

Profit growth was underpinned by the release of CSM added by profitable new business written in 2022 and H1 2023, and by the performance of our global annuity portfolio, which included asset optimisation actions taken over H1.

Contractual Service Margin (CSM) release increased 11% to £266m (H1 2022: £239m). The CSM release reflects the release of unearned insurance profits as the insurance service is provided over time. The growth is supported by profitable new business written in 2022 and H1 2023 and routine longevity reserve releases in H2 2022. In H1 2023 3.3% of the closing CSM pre-release (£8.1bn) has released into profit. 

Risk Adjustment (RA) release of £54m (H1 2022: £68m). The RA reflects compensation for taking non-financial risks. The RA is released if experience plays out as expected over time.

Expected investment margin increased to £213m (H1 2022: £139m). The expected investment margin incorporates the release of the prudence in the discount rate, the expected returns on surplus assets and the impact of back book asset optimisation actions taken over H1. 

Non-attributable expenses of £66m (H1 2022: £(65)m). Reflects non-attributable expenses i.e overheads, as the insurance liabilities reflect only expenses deemed directly attributable to the insurance contract.

Profit before tax was £285m (H1 2022: £412m) predominantly impacted by investment variances from the unrealised mark to market impact of higher rates on our portfolio.

Good volumes at consistent SII & IFRS margins, adding £0.4bn of deferred profit to the CSM and RA

During H1 2023, we wrote £5.0bn of global pension risk transfer (PRT) new business across 20 deals (H1 2022: £4.4bn, 25 deals). UK volumes increased 31% to £4.9bn (H1 2022: £3.7bn) and international volumes were £0.1bn (H1 2022: £0.7bn). 

Under IFRS 17, new business profits are now deferred to the CSM and RA on the balance sheet and recognised in operating profit over the lifetime of the contract. This associated volume added £0.4bn of deferred profit to the CSM and RA8, contributing to the growth of the CSM over H1 2023.

The £4.9bn of UK PRT delivered an 8.0% UK Solvency II new business margin (H1 2022: 8.7%) in line with our long-term average. 

We continue to be disciplined in our pricing and deployment of capital. We operate a capital light business and have successfully executed transactions over the last few years at strains comfortably below our 4% target. In H1 2023, overall PRT capital strain was just over 2%.

Successful execution in the UK over H1 2023

The UK market saw significant activity in H1. There has been a step-up in the number of pension schemes approaching the insurance market alongside an increase in £1bn+ transactions, with several such pension schemes intending to complete transactions this year. The global pipeline for 2023 is the largest we have seen, and we are predicting record PRT market volumes for the full year. We are well-placed to capitalise on this opportunity. We have been proactive in managing the levels of capital deployment, including use of reinsurance, to generate strong margins over time. 

LGRI's brand, scale and asset origination capabilities - through synergies and expertise within LGIM and LGC - are critical to our market leadership in the UK PRT market. Long-term client relationships, typically created and fostered by LGIM, have allowed us to help many pension plans achieve their de-risking goals. In H1 2023, we demonstrated our market leadership and solutions capabilities by writing a series of innovative transactions, including:

· c£2.7bn follow-on transaction with the British Steel Pension Scheme, executed under an umbrella agreement. Legal & General has now insured £7.5bn of the scheme's liabilities and, in doing so, the scheme becomes the largest pension scheme in the UK to have fully insured all its members' benefits.

· c£1.0bn conversion to buy-in of the Assured Payment Policies (APP) held by Legal & General's Group UK Pension and Assurance Fund and Legal & General's UK Senior Pension Scheme. This is expected to move to a full buy-out in H2.

· A continued flow of small scheme solutions. With 74% of our transactions falling into this category, we leverage technological innovation to serve smaller pension plans efficiently.

Well positioned to execute in H2 in the US and International markets; largest ever US deal in July

LGRI delivered US PRT new business premiums of $163m (H1 2023: £126m, H1 2022: $729m; £593m) in a market that is typically slower over H1. This included a transaction that secured the pension benefits of more than 4,000 retirees and beneficiaries. 

In July, we completed our largest ever US transaction for c$790m, followed by a further c$200m deal in August. We are actively pricing in the Canadian and Dutch markets too.

As the only insurer providing PRT to pension plans globally, Legal & General is uniquely positioned to offer holistic, multinational pension de-risking solutions.

Retail Division

1. This is the first time we are reporting under IFRS 17. Comparatives have been restated accordingly. For further information please see Note 2.01.

2. UK Insurance includes Retail Protection, Group Protection, Fintech and Mortgage Services.

3. Retail Retirement includes Individual Annuities, Lifetime mortgages, Workplace Admin, Personal Investing and Advice.

4. This represents the Workplace Savings administration business. Profits on the fund management services we provide are included in LGIM's asset management operating profit.

5. In the UK, annuity assets across LGRI and Retail are managed together. Estimated proportion of annuity assets belonging to Retail Retirement.

Operating profit of £230m

During the first half of 2023, Retail operating profit was £230m (H1 2022: £295m). Whilst insurance operating profit is up 4% (H1 2023: £243m, H1 2022: £234m) driven by resilient on-going profit releases in the UK and US, total operating profit is down given the lower contribution from Fintech (reflected in "Other" above), as valuation uplifts from H1 2022 did not repeat.  In the US, mortality experience continued to be elevated but lower relative to the prior year. We have fully utilised the $40m provision established at FY2022.

Contractual Service Margin (CSM) release increased 2% to £210m (H1 2022: £206m). The CSM release reflects the release of previously unearned insurance profits as the insurance service is provided over time. In H1 2023 4.6% of the closing CSM pre-release (£4.7bn) has released into profit. 

Risk Adjustment (RA) release of £49m (H1 2022: £44m). The RA reflects compensation for taking non-financial risks. The RA is released if experience plays out as expected over time.

Expected investment margin increased to £49m (H1 2022: £38m). This incorporates the release of the prudence in the discount rate, the expected returns on surplus assets and the impact of back book asset optimisation actions taken within the annuity portfolio over H1. 

Experience variances of £(26)m (H1 2022: £(11)m). This primarily reflects higher UK death rates in Q1 on the minority of business where we are not fully reinsured and also includes £8m of onerous contract unwind on legacy policies. 

Non-attributable expenses of £(39)m (H1 2022: £(43)m). Reflects non-attributable expenses i.e overheads, as the insurance liabilities reflect only expenses deemed directly attributable to the insurance contract.

Profit before tax was £144m (H1 2022: £352m) predominantly impacted by investment variances from the unrealised mark to market impact of higher rates on our annuity portfolio and the write-down of our investment in Onto.

Solvency II New Business Value decreased by £5m to £119m (H1 2022: £124m) with growth in Retail Annuities and US protection being offset by lower margins in UK protection due to higher interest rates and lower new business volumes. We continue to operate with a focus on disciplined pricing and on maintaining strong distribution channels.

Navigating a competitive landscape in H1

UK Retail protection gross premium income increased to £752m (H1 2022: £740m), with new business annual premiums of £76m (H1 2022: £85m) in what is an increasingly competitive market. L&G continues to lead this market with a share of 19.4%[40], delivering a point-of-sale decision for more than 80% of our customers.

UK Group protection gross premium income increasing 1% to £295m (H1 2022: £291m) thanks to strong retention and new business annual premiums of £53m (H1 2022: £63m). Our online "quote and apply" platform for smaller schemes continues to perform well, processing 4,512 new clients over the first half of the year (H1 2021: 3,308) and we continue to see growth in this part of the market. Group Protection supported 1,512 members of income protection schemes to return to work during the first half of the year.

US protection (LGIA) new business annual premiums increased 40% to $87m (H1 2022: $62m), with strong new business margins of 11.2% (H1 2022: 10.7%). Gross written premiums increased 5% (up 10% on a sterling basis, benefiting from FX movements) to $781m (H1 2022: $746m). Our digital new business platform, Horizon, is making it easier for customers and their advisors to apply and buy our term products. This is driving up our market share: LGIA ranked number one in the independent channel in the first quarter and grew to number three in overall US term market share. We expect to drive further sales growth and to reduce unit costs over the coming years. Over two thirds of new business is now submitted through our Horizon platform. 

Legal & General Mortgage Club facilitated £48bn of mortgages, (H1 2022: £50bn) reflecting reduced demand in the mortgage market due to higher interest rates. We remain the largest participant in the UK intermediated mortgage market and are involved in around one in five of all UK mortgage transactions. Our Surveying Services business facilitated just under 172,000 surveys and valuations (H1 2022: 276,000). Since buying a new house is often a catalyst for purchasing life insurance, the Legal & General Mortgage Club is a supporting component of our overall offering to customers. 

Retail annuity sales were £575m (H1 2022: £453m). Fixed term annuity ("FTA") sales were particularly strong and make up the largest proportion of new business growth. Customers who might have previously moved into drawdown are choosing FTA's given improved annuity prices as a result of the higher interest rate environment, and we expect ongoing growth in this market as a result.

Lifetime mortgage advances, including Retirement Interest Only mortgages, were £163m (H1 2022: £338m) reflecting a decline in demand related to higher interest rates. Throughout this period we have maintained pricing and underwriting discipline. 

Workplace Savings net flows were £3.0bn (H1 2022: £4.3bn), down year on year, but positive as a result of continued client wins and increased contributions. Workplace pension platform members increased to 5.0 million in H1 2023. We are continuing to focus on improving efficiency and scalability as the business grows.

Legal & General Capital (LGC)

1. Includes short term liquid holdings

2. Excludes costs relating to the announced Modular Homes closure

Total operating profit increased 13% to £296m

LGC operating profit increased 13% to £296m[41] (H1 2022: £263m) reflecting a strong contribution from our alternative asset portfolio of £230m (H1 2022: £202m).

Profit before tax2 was £104m, with investment and other variances of £(192)m, which is most notably driven by the impact of higher interest rates on the LGC portfolio.

Alternative asset portfolio grew 13% to £4.2bn

LGC has continued to strengthen its capabilities across a diversified range of alternative assets that are underpinned by structural growth drivers. Our alternative asset portfolio increased to £4,220m (H1 2022: £3,739m) as we deployed a further £0.3bn into new and existing investments. Through these investments, we originate assets that generate returns for shareholders, create attractive Matching Adjustment (MA)-eligible assets for our annuity portfolio, and supply attractive alternative assets to third-party clients. 

Specialist commercial real estate: supporting the levelling up agenda through strategic partnerships

Across the UK and US, we are investing in Specialist Commercial Real Estate (SCRE), including laboratory and real estate developments for the life sciences and technology sectors, mixed-use regeneration for towns and cities (such as through our £4bn partnership with Oxford University), and digital infrastructure for data warehousing and computer processing.

In H1 2023, Kao Data, our wholesale data centre platform, has continued to develop its existing three sites as well as announcing a new site in Manchester which will be powered by 100% renewable energy. Through Bruntwood SciTech, the UK's leading innovation, science and technology focused platform, we have continued to develop world-leading diagnostic and life sciences infrastructure. This year, the partnership announced a £1.7bn Strategic Regeneration Framework with the University of Manchester, to deliver a mixed-use city centre innovation district. Our 50:50 partnership with US real estate developer and asset manager, Ancora, continues to grow with 3 sites now planned, which are dedicated to driving life sciences, research and technology growth in North America. In summer 2023, Ancora L&G expects to begin construction on a life sciences centre in Providence, Rhode Island, providing 80,000 sq ft of world-class research space for the Rhode Island Department of Health.

Our Clean Energy portfolio expanded into new sectors

Supporting the Group's ambitions to address climate change and deliver shareholder returns, we invest in early-stage innovative clean technology companies and clean energy infrastructure which are needed to meet UK and global UN climate targets and Sustainable Development Goals. 

In our growth equity portfolio, Kensa, our ground source heat pump provider has made significant progress. In December 2022, Kensa opened the UK's largest production facility dedicated to ground source heat pumps, increasing output by 50%. In May 2023, the business announced a partnership with Octopus Energy, which provided an additional £70 million investment. Kensa is now the country's leading manufacturer and installer of ground source heat pumps.

In our clean energy infrastructure portfolio, we continue to deploy significant capital into new and existing renewable energy projects across wind, solar and battery storage, creating opportunities for our annuity business and for third party investment. As part of this deployment, LGC provided seed capital to support the first close of L&G NTR Clean Power Fund, which raised €390 million in April 2023, putting private capital to work to drive Europe's decarbonisation and energy security agenda. 

We also have a substantial pipeline of new investment opportunities across several geographies, including energy storage, electric vehicle technology and renewables, and expect to accelerate our pace of deployment into the sector in coming years.

Housing: Multi tenure platform continues to generate a profitable return

LGC continues to scale up its delivery across all housing tenures. Diversified across affordability and life stages, LGC's investments meet the UK's long-term social and economic need for quality housing for all demographics. During H1 2023, our housing portfolio grew to £2,246m (H1 2022: £2,190m) reflecting sustained long-term demand for our offering. 

LGC's Build to Sell business, Cala, has continued to perform well over H1 2023, in the face of a challenging market. Having grown to become the 10th largest housebuilder in the UK by revenue, in H1 2023 Cala delivered residential house sale revenue of £619m (H1 2022: £619m) and profit before tax of £73m (H1 2022: £98m) through the sale of 1,428 units (H1 2022: 1,527 home completions). Reservations on private units currently stand at 75% of the full year, providing confidence in the delivery of Cala's FY 2023 targets.

Our Affordable Homes business has continued to establish itself as one of the UK's leading institutional developers and managers of affordable housing, with a total operational pipeline of 6,766 and a Gross Asset Value of around £1.2bn. The business is well placed to create opportunities both for our annuity portfolio and for third party investors.

Growth in our Inspired Villages business has continued into 2023, driven by the partnership with NatWest Group Pension Fund. Our Later Living platform has made good planning and development progress, and Inspired Villages is on track to deliver over 5,000 homes for older people over the life of the partnership.

In H1 2023, we reluctantly announced our intention to cease production at our Modular Homes factory. Unfortunately, long planning delays mean that we have not been able to secure the necessary scale in our pipeline. 

Accelerating the growth of private asset managers through Alternative Finance

By investing in the real economy and technological advancements through our General Partners (GP) Investing and Venture Capital platforms, we are continuing to support growth businesses and deliver enhanced returns, whilst boosting job creation and innovation. 

Through partnerships such as those with Pemberton, NTR and ImpactA, we are accelerating the growth of mid-size private asset managers, providing institutional rigour and a network of relationships.

We continue to support UK and European mid-market lending through our GP investment in Pemberton, a leading European credit manager, in which we hold a 40% stake. The Pemberton platform has raised over €17.5bn (H1 2022: €14.9bn) from 187 investors globally across seven strategies since we first invested in 2014. In H1 2023 it delivered €52m in revenue (H1 2022: €45m). As the market evolves, Pemberton continues to innovate and add new products to its platform. In 2022 Pemberton launched NAV Financing, which will provide financing solutions to private equity funds' performing investment portfolios and the Risk Sharing Strategy, which will invest in junior tranches of loan portfolios originated by global banks. These follow the launch of the Working Capital Finance strategy which hit the $1billion of committed funds milestone in Feb 2023.

In March 2023, we invested in ImpactA Global, a new women-led Impact asset management firm. ImpactA Global will provide debt financing for sustainable infrastructure projects helping to bridge funding gaps in transformational projects and unlock critical investment to drive climate transition and reduce inequalities in emerging markets. LGC intends to provide up to $100m in cornerstone capital to ImpactA's inaugural fund.

Our Venture Capital funds portfolio supports the growth of over 600 early-stage companies. The university spin-out market is an area of particular focus for us, where we are able to leverage our long-standing relationships with the UK's leading research institutions to help create the outstanding businesses of the future. 

Legal & General Investment Management (LGIM)

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

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

3. Derivative overlays associated with UK DB net flows.

Operating profit of £142m, reflecting higher interest rates

Operating profit of £142m (H1 2022: £200m) reflects the impact of higher interest rates on assets under management, and therefore revenues, and is in line with H2 2022 (£140m). Despite significant inflationary pressure, we have taken action to keep absolute costs flat on an FX-adjusted basis.

Assets under management (AUM) decreased by 10% to £1,158.1bn (H1 2022: £1,289.7bn), reflecting the impact of market conditions and external net outflows over H1 2023 of £(12.3)bn (H1 2022: inflows of £65.6bn). This includes £19.7bn of overlay net flows relating to our UK DB Solutions business3, which is a partial reversal of positive flows in 2022, where we supported clients to achieve more efficient hedging strategies as part of preparing for 'Endgame' de-risking solutions. Excluding UK DB Solutions3, LGIM delivered positive external net flows of £7.4bn with a continued focus on higher-margin capabilities, generating £8.4m of annualised net new revenue (ANNR) in respect of net flows into ETF, Multi-Asset and Real Assets.

Management fee revenue decreased by 11% to £431m (H1 2022: £485m). Transactional revenue was robust at £9m (H1 2022: £9m) including execution fees from hedging activity and performance fees. The decrease in management fees is primarily linked to rising interest rates, particularly in the UK, which caused average AUM to fall by 13% over the past year. 

We are maintaining a disciplined approach to cost management whilst continuing to invest deliberately and for the long-term. We took expense actions over H1 2023, including selective reshaping of the workforce and restraint on recruitment and variable compensation to combat the impact of higher inflation and market movements on revenue. Costs of £298m in H1 2023 were flat on an FX-adjusted basis compared to H1 2022 (£294m).

Expanding our global footprint with International AUM of £457bn

We are successfully building internationally, with international AUM having grown by 78% since 2018 to £457bn, 39% of AUM. Our goal is for International AUM to represent more than half of our total AUM by the end of this decade.

We are a leading corporate pension manager in the US, working with clients to devise pensions de-risking strategies. We have refocused our index capabilities efforts on Index Solutions and have seen early success with $6.7bn in higher margin Index Plus mandates in H1. We are adding to securitised capabilities to broaden our Fixed Income offering and are building a real estate equity platform for the US market, creating a significant opportunity to mirror our success in the UK and provide a broader range of de-risking opportunities for our DB clients.

In Europe, our growth is being led by expertise in ETFs, Active Fixed Income and responsible investing. We have expanded the number of relationships with clients, consultants and intermediaries in our core markets of Germany, Italy, Switzerland and the Nordics, and have opened an office in Zurich. Our AUM across mainland Europe is £68.7bn.

This year, we have opened an office in Singapore to serve south-east Asian clients, onboarded our first client in Thailand and are expecting new mandates in Korea and Taiwan to fund in H2 2023. In Japan our AUM has more than doubled since 2019 and we are now Japan's 7th largest asset manager.[43] Our AUM in Asia and Japan has reached $167bn and we now have clients across 9 countries in the region. 

Supporting our institutional defined benefit clients achieve 'Endgame' objectives

In UKDB, we are supporting c2,000 clients to achieve their 'Endgame' objectives. Many are likely to choose LGRI as a pension risk transfer partner. An example of this is the British Steel Pension Scheme, which took its final step in fully reinsuring the £7.5bn of pension liabilities with LGRI via a £2.7bn buy-in. In H1 2023 79% of LGRI UK PRT transactions were with LGIM clients. In the US, improved funding ratios due to higher interest rates have increased demand for customised liability hedging strategies.

We are well positioned to support our global DB clients by delivering capabilities to help them manage their illiquid portfolios, to implement effective hedging strategies and to manage matching asset portfolios as they prepare for 'Endgame'. With over 75% of defined benefit pension schemes now recognising buy-out as their likely ultimate end-state, we expect to grow AUM and profits from providing these asset management services. As the UK DB market continues to consolidate, we are also supporting clients who are not yet fully funded by developing an enhanced proposition, ensuring that their assets are managed with a view to achieving their 'Endgame' goals.

Ongoing strength in Defined Contribution

The Defined Contribution (DC) business continues to attract new assets, with external net flows of £5.5bn, supported by the ongoing growth in Retail's Workplace pension business, which now has 5.0 million members. Annualised net new revenue was £6.5m and total UK DC AUM is £146bn (H1 2022: £130bn). This success is underpinned by LGIM's strong customer focus and innovative product proposition, as shown by a 93% persistency rate among our DC customers.

L&G also has one of the largest and fastest-growing UK Master Trusts, which now has £22.1bn of AUM, making it the first commercial Master Trust to surpass £20bn of assets under management. The growth reflects the increasing appeal of the structure for DC plans wishing to outsource their governance, investment and administration. Our UK Master Trust supports growth in Multi-Asset flows: this is the default option for many of our clients. Our ability to offer investors an integrated blend of high-quality investment solutions, pensions administration and Master Trust governance is a significant source of competitive advantage. In June, L&G's Master Trust won the coveted Corporate Advisor award for Best Master Trust for the third year in a row.

Accelerating growth in Global Wholesale

In UK Wholesale, we achieved our highest ever gross sales and ranked 2nd over H1 2023.[44] Our Strategic Bond Fund attracted strong inflows in the period totalling £200m demonstrating our strong Fixed Income credentials. Higher margin Multi-Asset funds now have over £10.5bn in AUM from UK retail investors. We continued to expand our Model Portfolio Service (MPS), further extending the successful Multi-Asset proposition into the maturing advisory market. 

A key driver of our Global Wholesale growth strategy is our ETF products which continue to perform well. Since acquisition of the ETF business in 2018, revenue has more than tripled. The range has continued to show resilience, against a challenging backdrop, with $1.2bn of external net flows in H1 2023 delivering an annualised net new revenue of $1.5m. LGIM is ranked second on AUM in the European thematic ETF market. Our diversified range consisting of Equity Thematic, Fixed Income, and Commodities ETFs has supported our strategy of growth into higher-margin areas. We are deepening our retail footprint in Germany through a partnership with Gerd Kommer Invest and recently launched our first co-branded ETF to provide broad diversified multi-factor exposure to global equities. In May, we announced a partnership with Widiba Bank in Italy, who are now distributing our thematic ETFs through their financial advisor network.  Our targeted product pipeline for H2 continues to focus on thematic investments, climate and energy transition.

Building a Real Assets Platform

Real Assets saw total net flows of £1.5bn (H1 2022: £0.7bn) driven by £2.1bn of Private Credit transactions of which the majority support LGRI's PRT proposition.  Private Credit AUM reached £17.0bn[45] in H1 2023 and we expect it to be core to future growth in flows as clients seek diversification of secure income and value protection. UK DB investors are now accessing these capabilities through our successful SIAF and STAFF private credit funds[46], and DC investors are also starting to show interest in our illiquid strategies.

Our Real Estate and Infrastructure Equity platform continues to grow with AUM of £19.7bn34. In H1 2023 we raised €390m in the first close of the Clean Power (Europe) Fund working in partnership with NTR. We have hired a team in the US to focus on real estate markets where we see potential. Our property fund for UK retail investors is one of the market leaders with over £1.3bn of AUM.  Our strategy is to externalise capabilities that we have built in collaboration with other parts of L&G.

Investment performance

40% of revenue comes from actively managed funds. The relative performance of our UK-managed Active Fixed Income strategies was strong with 64% of strategies out-performing over 1 year, 87% of strategies out-performing over 3 years and 84%[47] over 5 years. US-managed Active Fixed Income strategies have also performed well with 73% of strategies out-performing over 1 year, 83% of strategies out-performing over 3 years and 64% over 5 years. Multi-Asset strategies outperformed by 79% over 1 year, 54% over 3 years and 75% over 5 years.[48] Within Private Markets, 86%[49] of our Real Estate Equity funds have outperformed over 3 years and our Private Credit performance remains strong.

Leading in responsible investing

We are an active steward of our clients' assets and are committed to raising standards in addressing the environmental and social challenges arising from a rapidly changing world. As at 30th June 2023, LGIM managed £331.6bn (H1 2022: £271.2bn) in responsible investment strategies explicitly linked to ESG criteria for a broad range of clients.[50]

ESG innovation continues to be core to our product agenda. We have recently launched the Future World ESG Developed Fossil Fuels Exclusion Index Fund, developed in collaboration with the National Trust, the largest conservation charity in Europe. H1 also saw the launch of a Global Diversified Credit fund aligned to the UN's Sustainable Development Goals, and a suite of Net Zero, Paris Aligned and bespoke ESG exclusion funds helping clients meet their own climate commitments.

As responsible investors, LGIM aims to vote every share that we hold and publish our voting activities on our dedicated website.[51] We rate around 17,000 companies through our proprietary scoring system, the LGIM ESG Score, and capture over 5,000 companies across 20 climate critical sectors within our flagship corporate engagement programme, the Climate Impact Pledge. We are active collaborators with our peers through global organisations such as the CA100+ and the IPDD (Investors Policy Dialogue on Deforestation). LGIM recently won the Sustainability Provider of the Year Award at the Pensions Age awards. This year we have added dedicated Investment Stewardship resources in Asia for the first time, as our reach and influence continue to expand globally.

Borrowings

The Group's outstanding core borrowings totalled £4.3bn at 30 June 2023 (FY 2022: £4.3bn; H1 2022: £4.4bn). There is also a further £1.3bn (FY 2022: £1.2bn; H1 2022: £1.2bn) of operational borrowings including £1.1bn (FY 2022: £1.0bn; H1 2022: £1.0bn) of non-recourse borrowings. 

Group debt costs of £106m (H1 2022: £108m) reflect an average cost of debt of 4.7% per annum (H1 2022: 4.9% per annum) on an average nominal value of debt balances of £4.5bn (H1 2022: £4.5bn).

Taxation

The H1 2023 effective tax rate reflects the different rates of taxation that apply to Legal & General's overseas operations.

Solvency II

As at 30 June 2023, the Group had an estimated Solvency II surplus of £9.2bn over its Solvency Capital Requirement, corresponding to a Solvency II coverage ratio of 230%. 

1. Please see disclosure note 6.01(c) for further detail.

Operational surplus generation was level at £947m (H1 2022: £946m), after allowing for amortisation of the opening Transitional Measures on Technical Provisions (TMTP) and release of Risk Margin. 

New business strain was £(195)m, primarily reflecting PRT volumes written at a capital strain of just over 2%. This resulted in net surplus generation of £752m (H1 2022: £825m).

Dividends paid represent the payment of the 2022 final dividend in June 2023, which is the larger of the two dividends paid during the year.

Operating variances include the impact of experience variances, changes to assumptions and management actions. The net impact of operating variances over the period was negative and predominantly reflects timing differences which we expect to reverse in H2 (e.g. the execution of external and intragroup reinsurance). 

Market movements of £18m primarily reflect the impact of rising rates on the valuation of our balance sheet, partially offset by other, smaller variances such as credit spread dispersion in sub-investment grade assets, exchange rates, inflation and property.

The movements shown above incorporate the impact of recalculating the TMTP as at 30 June 2023.

Sensitivity analysis2

2. Please see disclosure 6.01 (f) for further details.

The above analysis does not reflect all possible management actions which could be taken to reduce the impact 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 and inflation 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 spreads and risk-free rate sensitivities are primarily non-economic arising from movements 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 30 June 2023 are shown below1:

The key economic assumptions as at 30 June 2023 are as follows:

1. Please see disclosure 6.02 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 PRA-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 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. The risks are expected to remain applicable for the remaining six months of the year.

RISKS AND UNCERTAINTIES TREND, OUTLOOK AND MITIGATION

RISKS AND UNCERTAINTIES TREND, OUTLOOK AND MITIGATION

RISKS AND UNCERTAINTIES TREND, OUTLOOK AND MITIGATION

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 investors will take place at 10:30am UK time today at One Coleman Street, London, EC2R 5AA. There will also be a live webcast of the presentation that can be accessed at www.legalandgeneralgroup.com/investors/results-reports-and-presentations. 

A replay of the presentation will be made available on this website by 18th August 2023.

Definitions

Definitions are included in the Glossary on pages 105 to 110 of this release. 

Forward-looking statements

This announcement may contain 'forward-looking statements' with respect to the financial condition, performance and position, strategy, results of operations and businesses of the Company and the Group that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as 'may', 'could', 'will', 'expect', 'intend', 'estimate', 'anticipate', 'believe', 'plan', 'seek', 'continue' or other words of similar meaning. By their very nature, forward-looking statements are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and the Group's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Recipients should not place reliance on, and are cautioned about relying on, any forward-looking statements. 

There are several factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements. The factors that could cause actual results to differ materially from those described in the forward-looking statements include (but are not limited to): changes in global, political, economic, business, competitive and market forces or conditions; future exchange and interest rates; changes in environmental, social or physical risks; legislative, regulatory and policy developments; risks arising out of health crises and pandemics; changes in tax rates, future business combinations or dispositions; and other factors specific to the Group. Any forward-looking statement contained in this document is based on past or current trends and/or activities of the Group and should not be taken as a representation that such trends or activities will continue in the future. No statement in this document is intended to be a profit forecast or to imply that the earnings of the Group for the current year or future years will necessarily match or exceed the historical or published earnings of the Group. Each forward-looking statement speaks only as of the date of the particular statement. Except as required by any applicable laws or regulations, the Group expressly disclaims any obligation to revise or update any forward-looking statement contained within this document, regardless of whether those statements are affected as a result of new information, future events or otherwise.

The information, statements and opinions contained in this announcement do not constitute an offer to sell or buy or the solicitation of an offer to sell or buy any securities or financial instruments nor do they constitute any advice or recommendation with respect to such securities or other financial instruments or any other matter

Caution about climate information

This announcement contains climate and ESG disclosures which use a large number of judgments, assumptions and estimates. These judgments, assumptions and estimates are likely to change over time. In addition, the Group's climate risk analysis and net zero strategy remain under development and the data underlying the analysis and strategy remain subject to evolution. As a result, certain climate and ESG disclosures made in this announcement are likely to be amended, updated, recalculated or restated in future announcements. This statement should be read together with the cautionary statement contained in the Group's 2022 Climate Report.

Going concern statement

Going concern statement is included on disclosure note 4.01(i) on page 46 of this release. 

Directors' responsibility statement

We confirm to the best of our knowledge that:

i. The consolidated interim financial statements have been prepared in accordance with UK-adopted IAS 34 Interim Financial Reporting;

ii. The interim management report includes a fair review of the information required by DTR 4.2.7, namely an indication of important events that have occurred during the first six months of the financial year and their impact on the consolidated interim financial statements, as well as a description of the principal risks and uncertainties faced by the company and undertakings included in the consolidation taken as a whole for the remaining six months of the financial year;

iii. The interim management report includes, as required by DTR 4.2.8, a fair review of material related party transactions that have taken place in the first six months of the financial year and any material changes in the related party transactions described in the last Annual Report and Accounts; and

iv. The directors of Legal & General Group Plc are listed in the Legal & General Group Plc Annual Report and Accounts for 31 December 2022. A list of current directors is maintained on the Legal & General Group Plc website: https://group.legalandgeneral.com/en/about-us/our-management/group-board.

By order of the Board

Sir Nigel Wilson Stuart Jeffrey Davies

Group Chief Executive Group Chief Financial Officer

14 August 2023 14 August 2023  

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