Performance in 2008

Gross premiums for the Risk business were £3,978m (2007: £3,106m), an increase of 28%.

Protection premiums (Individual and Group protection) accounted for £1,090m of this total. Present Value of New Business Premiums (PVNBP) for protection (Individual and Group) was £1,005m (2007: £1,161m). New business APE for the protection business was £207m (2007: £223m).

Individual protection total premiums were £783m (2007: £725m), an increase of 8%. New business [APE] for Individual protection was £140m (2007: £160m).

Group protection total premiums were £307m (2007: £279m), and new business APE was £67m (2007: £63m), an increase of 10% and 6%, respectively. The improvement in sales, achieved in a highly competitive market, reflects an ongoing focus on quality service.

Given the long term nature of the business, Legal & General regards Embedded Value (EV) methodology as a useful supplementary means of measuring and managing protection business performance. On the [EV] basis, the protection business generated a new business margin of 6.2% and a cash payback after five years (2007: four years). The continued downward pressure on margins was the result of competitive market repricings, a reduction in the sum assured due to a decrease in mortgage levels and a higher cost of capital. Legal & General, however, succeeded in achieving efficiency improvements and reductions in administration expenses.

Annuity new business sales for 2008 were £281m on an APE basis (2007: £205m). Individual annuity sales were £87m APE, a decrease of 6%, while Bulk Purchase Annuities (BPAs), including pension buyouts, were £194m APE, an increase of 73%. The new business generated in annuities in 2008 equated to £2.8bn in new Assets Under Management (AUM), bringing total AUM for the Annuities book to £17bn (2007: £16bn).

2008 was a record year for [BPAs], driven by explosive growth in the new market for pension buyouts in the first half of 2008. The main growth was in the first half of 2008, as business volumes for large transactions, which are always in any case sporadic, slowed during the latter part of the year, reflecting greater uncertainty over asset prices.

Margins for annuity business (Individual and BPA) for the year were 7.4% (2007: 9.1%). This margin decline reflected the shorter duration of new business in 2008 versus previous years, an increased cost of capital and the requirement to increase provisions for future credit defaults.

We regard the annuities business as a ‘spread’ business, where we earn an additional margin above that generated by the underlying assets backing the annuity book. In 2008, earned interest margin for the annuity book was 101 basis points (bps), compared with 75bps in 2007. This equates to an Internal Rate of Return of >15% (2007: >15%). We have increased our reserves for credit defaults by £650m.

The General Insurance business reported sales of £296m, down 4% against 2007. The GI operating loss for 2008 was £2m (2007 operating loss: £67m). The improvement reflects a year of fewer flood and other weather-related events, as well as increased efficiencies in the operation of the business.