Legal & General (L&G) saw a significant rise in operating profits in the first half, up 27% to £1bn, with progress across all divisions.
The board declared an interim dividend of 4.3p, 7.5% ahead of the prior year interim, and in line with the new dividend policy of paying out 30% of the previous year's full year dividend at the half year.
The shares were broadly flat following the announcement.
Legal & General serves markets with a lot of growth potential.
It is a market leader in the provision of low cost investment products and services, having been an early entrant into the tracker funds market and subsequently building up a substantial business in this area.
Auto-enrolment has seen the group become the UK's largest defined contribution pension manager, with Workplace customer numbers increasing 20% this half. By 2018, the vast majority of employees will, by law, have to have been signed up to some sort of scheme, and an extra £17bn of new money is expected to flow into workplace pensions by 2019/20.
Changes to pension rules have diminished the significance of L&G's individual annuity sales. 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 existing defined benefit (DB) pension schemes. The UK DB market alone is worth an estimated £2trn.
While the UK remains the group's centre of gravity, and with current economic headwinds that could yet prove a problem, international expansion should open up further opportunities. International flows accounted for 90% of net inflows in LGIM this half while the US defined benefit market is four times larger than the UK, and demand for de-risking solutions is growing rapidly. L&G completed 3 small bulk annuity deals in the first half, building on the 6 signed in 2016, as it looks to develop a foothold across the pond.
However, earnings mix has been a little disappointing for investors, with L&G Retirement delivering the bulk of growth, boosted by one off releases. The investment management business, where profit growth has been slower, is capital-light and generates recurring income, whereas annuity revenues have become lumpier as the group increasingly relies on blockbuster bulk annuity deals. A more balanced spread of growth would be welcome going forwards.
Longer term L&G appears well set, operating in markets which benefit from wider economic and demographic trends. The capital position is solid, with a Solvency II ratio of 186%, while offering an attractive prospective yield of 5.5%, with analysts expecting steady dividend increases from here.
Half Year Results
At £566m, Legal & General Retirement (LGR), continues to deliver the bulk of operating profits. A 40% increase in first half operating profit reflects a £126m mortality release, as the group altered its assumptions to reflect a higher than expected rate of mortality. Excluding this release, operating profits in LGR rose 9%.
Legal & General continues to see demand for its corporate Pension Risk Transfer offering, completing £1.6bn of bulk annuity transactions plus an £800m longevity insurance transaction in the half. Activity is expected to increase in the second quarter, and L&G is currently quoting on £12bn of UK deals. In retail, individual annuity sales rose 118% to £345m, with LGR Retail now managing over £21bn of assets for 550,000 individual customers.
Legal & General Investment Management (LGIM) saw operating profits rise 13% to £194m, as assets under management rose 13% to £951.1bn, following net inflows of £21.7bn.
The direct investment business, Legal & General Capital, saw operating profits rise 5% to £142m. That reflects a particularly strong performance from the traded portfolio, where profits rose 24%. Profits of £151m at Legal & General Insurance remained flat.
L&G continues to target earnings per share growth of 10% per annum, and net release from operations by 10% per annum, from 2016-2020.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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