Legal & General has announced full year results. Net cash generation and operating profit were both up by 14%, earnings per share (EPS) was up 11% and the full year dividend was increased by 19%. The Group's Solvency II surplus came in at £5.5bn, representing a coverage ratio of 169%. This is above the group's own target (greater than 140%) but below that reported by Aviva, Prudential and Standard Life. The shares fell by 5% in early morning trading.
Retirement: operating profit increased 49% to £639m. UK bulk annuity sales were £1,977m, from 63 policies (2014: £5,987m from 54 policies). The group entered the US and European pension risk transfer markets in 2015, the former is said to provide "a significant opportunity for further growth". Individual Annuity sales were down 45% to £327m following the 2014 Budget changes and L&G expects this market to remain subdued.
Investment Management (LGIM): operating profit was up 11% to £355m. Total assets under administration (AUM) increased 8% to £746.1bn; including a fivefold increase in external AUM net flows (to £37.7bn). Assets in Liability Driven Investment (LDI) and Multi-Asset solutions increased 15% to £338.2bn, Defined Contribution assets increased by 13% to £46.1bn and Workplace Savings assets managed by LGIM rose 37% to £14.4m.
L&G Capital increased operating profit by 14% to £223m. Group wide direct investments were up 22% to £7.0bn.
Insurance operating profit fell by 21% to £293m, despite a 2% increase in UK Protection gross premiums. This was due to a one off change in the way profits are modelled which will defer a higher proportion of cash generation and profit into later years. Savings operating profit fell 6% to £99m and L&G America operating profit increased by 34% to $125m.
L&G expects international demand for de-risking strategies and UK demand for LDI, Multi Asset, Real Asset and Fixed Income strategies to remain strong, and is targeting a 6-7% increase in operational cash generation across the main business areas in 2016. The group commented:
"We have a robust business model which has proved to be adept and resilient in dealing with fiscal and regulatory changes in our sector. We are planning for more global economic and market volatility and are well positioned for continued pressure on pricing and changes in product mix in our industry...We remain confident in the outlook for our business."
Legal & General is a market leader in the provision of low cost investment products and services, having been an early entrant into the tracker funds market. It has subsequently built up a substantial passive investments business.
L&G serves markets with a lot of inherent growth potential. They have a 20% share of the auto-enrolment pensions market, and by 2018 the vast majority of employees will have to have been signed up, by law. Contributions from its auto-enrolment pension scheme members should rise strongly over the next few years. It has plenty of scope to sign up new schemes too, with the number of people auto-enrolled expected to treble between now and 2030.
Changes to pension rules have seen L&G's individual annuity sales fall sharply. However, demand for L&G's bulk annuity schemes and liability-driven investment products should remain strong, as more companies seek to de-risk their defined benefit (DB) pension schemes. The UK DB market is worth over £1,000 billion with only about £50bn currently insured.
International expansion should open up further opportunities for the group. In October, L&G signed its first bulk annuity contract in the US. The US defined benefit market is four times larger than the UK, and demand for de-risking solutions is growing rapidly. The deal gives L&G an important foothold in this market, and the opportunity to build its market share.
The shares offer a yield for the coming year of 6.1% rising to 6.5% by FY18, according to analyst consensus forecasts, with the dividend having grown by 20% on average each year over the last four years. Volatile financial markets can be tricky for banks and insurers in the short term, since many of their assets are linked to market investments. But Legal & General appear well set with their focus on long term structural growth opportunities and that yield looks attractive in the near term.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.