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L&G - Bulk annuities offset weaker investment management

Nicholas Hyett | 9 August 2016 | A A A
L&G - Bulk annuities offset weaker investment management

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Legal & General Group plc Ord 2.5p Shares

Sell: 278.90 | Buy: 279.00 | Change -3.10 (-1.10%)
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Shares in Legal & General are down 4% this morning, following the release of half year results.

Adjusted operating profits are up 10%, to £822m, as falls in Investment Management, Insurance and Savings are more than offset by positive contributions from the Retirement and Capital divisions. Group return on equity increases 1.3 percentage points to 20.4% with net cash generation for the half increasing 16% to £727m.

Adjusted Earnings per share rose 14% to 11.2p in the first half while the interim dividend increases to 4p. The group has adopted a new formulaic approach to setting the interim dividend which, from today, will be 30% of the previous year full dividend.

The Group Solvency II ratio is 158%, with £5.3bn of surplus capital (compared to a ratio of 169% and surplus of £5.5bn a year at FY15).

Legal & General Investment Management (LGIM) increased assets under management (AUM) by 18% to £841.5bn, boosted by strong market performance towards the end of June. External net inflows were £9.6bn (H115: £13.8bn), although operating profits fell 3% to £171m.

Legal & General Retirements (LGR) saw annuity assets up 18% at £51bn, as well as rapid growth in the lifetime mortgage product with advances of £231m compared to £37m in H115. Annuity sales improved markedly to £3.8bn (H115: £1.3bn) boosted by bulk annuity sales of £3.6bn after a £2.9bn back book transaction with Aegon. Operating profits improved 44% to £406m.


The Group believe that the opportunities available to it remain broadly unchanged by the referendum result. The group has lowered full year cash guidance (provided on c. 75% of cash generation) to 5% from 6-7%.

Appetite for its bulk annuity products is expected to remain strong, with international demand for pensions transfer risk expected to continue for many years. The group is currently quoting on over £13bn of buy-in/buy-out deals in the UK and over £16bn of longevity deals.

The lifetime mortgages market is expected to exceed £2bn for the first time in 2016, with Legal & General targeting £500m of new business in 2016, representing c. 25% of the market.

Our view:

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 by 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 alone is worth an estimated £2,000 billion.

International expansion should open up further opportunities for the group. Last 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 mix of earnings in the first half will be a little disappointing for investors. The LGIM business, which saw revenues decline today, is capital light and generates welcome recurring income, whereas annuity revenues have become lumpier as the group increasingly relies on blockbuster bulk annuity deals.

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. The shares offer a prospective yield for the coming year of 6.6% rising to 7.4% by FY18, according to analyst consensus forecasts.

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.