GROUP CHIEF EXECUTIVE'S REVIEW.

Tim Breedon, Group Chief Executive (photo)

“We remain confident in our business model and strategy. Our leading market positions in UK savings, annuities, protection and asset management are delivering healthy returns for shareholders.”

TIM BREEDON
GROUP CHIEF EXECUTIVE


OUR STRATEGY CONTINUES TO DELIVER.

Our results for 2011 show continued progress in growing and reshaping Legal & General. At the same time, we are generating a healthy return for shareholders, and contributing in a variety of ways to broader economic growth and wellbeing, whilst looking after more than seven million individual, corporate and institutional customers.

The macroeconomic and market background in 2011 remained uncertain: the effects of the credit crisis continued to work through the system, while both the economic data and a period of market volatility underlined concerns about the potential for a second stage of the credit crunch, with instability in the eurozone a particular concern.

STRONG PERFORMANCE

WORLDWIDE SALES ([APE])

£1.9bn

(2010: £1.8bn)

Legal & General, however, performed well, with growth in sales, [operational cash generation] and operating profits. With a [Total Shareholder Return] of 11%, we outperformed our sector in terms of returns for investors in 2011, and on a longer-term view, we rank amongst the leading life assurance companies in the world in terms of returns to shareholders.

The Company’s strategy remains clear, and focused. Legal & General’s strong operational cash generation continues to be a key metric, and through our four profitable business divisions we seek to ensure that we deliver balanced, high quality earnings. In 2011 each of these divisions performed well, with significant progress across many product areas including large [bulk purchase annuities], workplace pensions, and the increasing internationalisation of our investment management and pension fund de-risking capability.

FULL YEAR DIVIDEND PAYABLE

£376m

(2010: £279m)

A common feature of these successes was our operational efficiency and effectiveness: characteristics which we also emphasise strongly at a Group-wide level, especially in the increasingly efficient use of capital and the containment of costs as we upgrade operational systems.

Last year, this Report gave greater emphasis than usual to risk management. In an uncertain environment this is still very important. Legal & General’s overall capital position remains strong, with £3.8bn of surplus regulatory (IGD) capital, and our investment portfolio is actively managed with very minimal exposures to areas of concern including sovereign and bank debt in the peripheral eurozone countries.

REGULATORY CHANGE

This capital strength and operational capability also enables us to prepare with confidence for the sweeping regulatory changes in prospect over the next few years. I have often said publicly that regulatory uncertainty, and the associated risk of an ill-judged and indiscriminate regulatory over-correction, is among the largest challenges our industry faces. During 2011 we worked hard to secure outcomes to the EU’s [Solvency II] process which properly reflect the interests of UK savers and pensioners, and which would enable the insurance sector in the UK to continue to make a positive contribution to the broader economy. While the EU’s timetable for implementing the new capital rules has slipped back, and much of the detail has still to be finalised, I am pleased that the long-term nature of many insurance products is now a proper focus of debate within the EU institutions.

Among the long list of other regulatory changes we face, the most significant is the Retail Distribution Review (RDR), which comes into effect at the end of 2012. Here I am pleased to report that Legal & General’s multi-channel distribution, with its network of strong partnerships, is likely to stand us in good stead. We intend, however, to further augment our already strong service levels for our customers over the next few years. Ultimately, we are only as good as the service we provide to our customers, and a radical improvement in customer engagement has been set as one of our top five strategic objectives between now and 2014.

PEOPLE

Last September, I notified the Board of my intention to retire from Legal & General by the end of 2012. I would like to thank my colleagues and all of Legal & General’s employees for their support and commitment since my appointment as Group Chief Executive on 1 January 2006. It has been very much a collective effort, but I believe that today’s Legal & General has the right skills, attitudes and strategies, and the financial strength, to serve its customers and shareholders well in the years to come.

OUTLOOK

The macroeconomic, regulatory and social policy environment continues to be unstable and challenging for the life assurance industry. However, your Company has a future rich in opportunity as a result. And a change in post-credit crisis attitudes will create a premium for those companies, such as ours, which do business responsibly, paying due regard to their broader social purpose and putting the customer at the heart of their business model.

Your role as shareholders is vital in securing this future, as is the return we are able to deliver back to you. I am pleased therefore that this year’s higher recommended final dividend of 4.74p, and the capacity we have outlined for further growth, are indicative of our continued confidence in the outlook for the business.

Thank you for your support,

TIM BREEDON
GROUP CHIEF EXECUTIVE

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