Group Chief Executive's Review

   Tim Breedon
   Group Chief Executive

Financial Results

Our 2007 financial results show Legal & General continuing to perform strongly. While 2006 profits benefited from significant one-off gains from regulatory changes, 2007 was, by contrast, a year in which we chose to add to reserves. Setting aside these exceptionals, the business shows a remarkably consistent performance across two very different years for our markets.

Our £1,437m of new business APE and £912m of EEV Operating profit (£658m of IFRS Operating profit) in 2007 were achieved against the backdrop of increased volatility in investment markets, a decline in housing activity and increasing uncertainty around the regulatory and tax environment in which we operate. Fixed income markets experienced a sharp widening in credit spreads and increased volatility. The quality of the Group’s fixed income portfolio however remains high, and there has been no adverse impact on our corporate bond default experience.

This year’s EEV pre-tax results include a strengthening of annuitant longevity assumptions of £269m. The equivalent effect to the IFRS pre-tax result is £214m. These changes, as well as our continuing investment in the business, stand us in good stead for the future.

Despite delivering improvements in underlying business performance, our General Insurance business was impacted by significant (£84m) claims arising from storm Kyrill and the summer floods. Regulatory uncertainty and change impacted some other markets, including traditional Bulk Purchase Annuities, where a restriction was placed on buyouts by schemes eligible for the Government’s Financial Assistance Scheme, and investment bonds, where uncertainty over the Chancellor’s Pre-Budget Report proposals for changes to Capital Gains Tax impacted confidence.

More positively, towards the end of 2007 we saw the emergence of the new market for open-scheme Bulk Purchase Annuities, which we had been predicting for some time. This enabled us to deliver record Bulk Purchase Annuity new business volume for the year, with a particularly strong fourth quarter.

2007 Achievements

In more difficult markets, Legal & General’s strategic clarity and operational strength becomes more important than ever. We have three focused and successful businesses: Risk, Savings and Investment Management. These provide diversity of earnings, focusing on growing profitable new business and increasing the value of the business already in force. Our approach to business maximises the strength of our balance sheet, our powerful brand, and the skills of our people, building on success in our home market and exporting experience where appropriate.

During 2007, Legal & General achieved significant financial and operational advances within this strategic framework.

Total Risk Premiums reached a record high of £428m, with the annuities businesses enjoying a strong year. Individual Annuity sales grew by 18%, while in the Bulk Purchase Annuity market we won record volumes of new business. In Savings, we achieved significant sales growth for the majority of our products while investing for future growth and taking steps which will help in improving our margins in future. Progress in Investment Management was outstanding, with £53bn of new funds entrusted to us by clients.

During the year we completed the major components of our balance sheet restructure, and began our £1 billion share buyback programme. Our capital review aimed to ensure that we have the right amount of capital, of the right type, held in the right places within the Group. This complex exercise was achieved in a short timeframe and in total has added £0.5bn to the embedded value of the Company during 2006 and 2007. Our step-by-step approach to ensuring that capital is used in the most efficient and flexible way and our commitment to returning excess capital to shareholders place us at the forefront of our sector in terms of balance sheet management.

We added to distribution capability, negotiating a number of new partnerships with UK banks and building societies. We continued to work closely with Nationwide Building Society on the implementation of our major new partnership, which launched on 1 February 2008. Nationwide has over 13 million members, serviced through 900 locations. In addition, we extended the duration of our contract with Cofunds, the leading platform provider, and broadened the range of products it provides.

Overseas, we concluded a Memorandum of Understanding to establish a joint venture company with Bank of Baroda and Andhra Bank in India. The two banks collectively have over 40 million customers through approximately 4,000 branches and offices. This is an excellent bancassurance distribution network in a fast growing insurance market, and presents us with significant opportunities in the medium term.

Achieving greater operational efficiency was an important objective during the year. In 2007, we took significant steps towards outsourcing some non customer facing parts of our IT, a move which will generate considerable expense savings over the next few years.

During the year, Legal & General continued to play an active part in the wider community. Our commitment to building a sustainable business is important to us, and this is reflected in our commitment to Corporate Social Responsibility (CSR), as detailed CSR section of this report and in the CSR Report: www.legalandgeneralgroup.com/csr.

Outlook

The more turbulent environment of 2007, we believe, underlines many of the core strengths of Legal & General for its customers. Quality of product, diversity of distribution, good customer service and administrative capability, a skilled, dedicated and adaptable workforce, robust capital and a strong reputation are strengths which we believe will continue to serve us well.

“Legal & General has a clear purpose and a strong sense of strategic direction. Our aim now is to implement that strategy, building a company which, every single day, becomes even better at serving customers and rewarding shareholders.”

Tim Breedon 
Group Chief Executive