Legal & General’s strong earnings per share (EPS) and cash flow growth underpin our 20% growth in dividend. Double-digit sales growth showed the strength and value of the products we provide for consumers, companies and institutions.
Our strong performance reflects the importance and resilience of insurance, savings and investment across all our markets. Our performance was particularly strong in the UK – a zero-growth economy, with falling real wages, huge structural imbalances and a rapidly ageing population. We also performed well in similarly challenged economies such as the US and France, as well as making good progress in high-growth economies such as the Gulf, China and India.
WHAT ‘EVERY DAY MATTERS’ MEANS TO MY COLLEAGUES
EARNINGS PER SHARE
RETURN ON EQUITY
UK PENSIONERS WHO DEPEND ON US FOR THEIR INCOME
EMPLOYEE ENGAGEMENT INDEX
During 2012 we worked hard to embed our ‘Every Day Matters’ organising thought, which sits at the heart of our brand, into everything we do. This included a ‘One Day’ exercise in September where we asked employees to tell us about their interactions with customers and each other on that day. Throughout this report you will find examples of their experiences and the difference we make to our millions of customers every day.
This year we also undertook several broader pieces of research looking at changes to demographics and life stages, the low levels of savings and protection in the UK and the impact this can have on people’s lives if they find themselves unable to work. In our ‘35Cubed’ review we saw a changing and complex network of financial transactions within families. Our ‘Deadline to the Breadline’ report highlighted that the average UK family still has only 19 days before their savings run out.
INCREASING OUR OPERATIONAL EFFECTIVENESS
During the year we made changes to management structures to bring international operations closer to the main UK operating divisions, so as to benefit from their scale and expertise. Our operations in France and the Netherlands now sit under John Pollock in Protection and Annuities, whilst our joint venture in India has been moved to our Savings business under Mark Gregory. We also rotated many of our senior managers into new roles.
USING TECHNOLOGY TO IMPROVE CUSTOMER SERVICE
We have also focused on harnessing technology to provide better services to customers. Colleagues successfully implemented challenging technical projects, including our successful Retail Distribution Review (RDR) and pensions auto enrolment propositions.
MAXIMISING THE POTENTIAL OF CHANGING MARKETS
2012 saw significant regulatory changes, which will impact our industry and its customers. These included the RDR, ending the payment of commission on retail investment products, the unwelcome abolition of gender-based pricing for insurance products following a European Court ruling, and the introduction of pensions auto enrolment.
We responded effectively to these changes, introducing new RDR-compliant propositions for advisers, growing our distribution capability through new partnerships particularly with building societies, and implementing gender-neutral pricing ahead of the deadline. Pensions auto enrolment was a particular success: the Government should be congratulated for driving this through. We expect to auto-enrol 500,000 employees of major companies, including the Co-op, Boots, Asda, Barclays and Marks & Spencer by the end of 2013.
The timetable for the EU’s Solvency II legislation has slipped further, with implementation now unlikely before 2017. We submitted our internal capital model to the regulator in November. The cost of this programme for Legal & General is almost £140m, and for the UK industry, estimated at £3bn-£4bn. We regard these costs as indefensible during a period of financial crisis.
FROM PROFIT TO PURPOSE
“Legal & General’s 12% growth in EPS reflects our improving business strengths in project execution, operational scale and efficient manufacturing and distribution. We have plenty of ambition, capability and opportunity to grow earnings further in 2013...
“Beyond this, as a socially useful company, we play a wide role in providing financial services to our customers at the most exciting, critical or difficult moments in their lives... providing investment and associated growth for the wider economy... and through our CSR work in many of the communities in which we operate.”
TRIANGLE OF AUSTERITY
Developed economies are locked in a ‘Triangle of Austerity’:
- Fiscal austerity as governments cut spending.
- Regulatory austerity as risk is reduced.
- Funding austerity as banks shrink balance sheets and cut lending.
Each of these is creating opportunities for Legal & General.
Fiscal austerity – the UK Government has debt of over £1tn, and an unsustainable deficit of £120bn – and falling government spending on welfare means that more individuals will need to make greater use of protection. Greater longevity and an ageing population requires greater pension saving through auto enrolment and more flexibility in decumulation mechanisms including annuities.
Regulatory austerity and de-risking, including for pension funds in the UK and internationally, will enable us to extend our established £64bn business delivering liability-driven investment, and in pension buyouts.
Funding austerity and shrinking bank balance sheets create new long term investment opportunities, for example in infrastructure and housing, for insurers including Legal & General. We have already invested over £1.2bn in these sectors in the UK.
STRATEGY AND OUTLOOK: ‘ACCELERATED EVOLUTION’
Opportunities to accelerate our evolution include further internationalisation of LGIM. We have already succeeded in winning new investment mandates in the US, Europe, the Gulf, and Asia, and are well positioned to access some of the major pools of funds available for investment internationally.
We also see opportunities to extend our experience in the provision of protection and retirement solutions for companies and individuals into further international markets, and expand our role as a principal investor in infrastructure, property and businesses.
Digital technology creates improved opportunities for customer servicing and interaction, as well as further efficiency gains in processing. We have delivered successfully on digital projects in 2012, but more remains to be done, and this is an area of strategic focus for us.
Our strong balance sheet moreover gives us additional options to grow through disciplined, selective acquisitions, and we have recently increased our in-house M&A capability.
GROUP CHIEF EXECUTIVE
Watch a video presentation from CEO Nigel Wilson here: http://investor.legalandgeneral.com /video.cfm?v=41695